What Is FUTA Tax? Rate, Who Pays, and Form 940
FUTA is the federal unemployment tax employers pay on the first $7,000 of each employee's wages. Who owes it, how to calculate it, and when to file.
Almost every explanation of this tax gives you the same four numbers and stops: six percent, a credit of five point four percent, a net rate of six tenths of one percent, and a maximum of forty two dollars per employee. Those numbers are correct, but they will not tell you what you actually owe, and this guide will. What surprises small employers is that forty two dollars is a ceiling per person rather than a rate on payroll.
Here is what that distinction actually costs. Two businesses each pay out $700,000 in wages. The first has ten long tenured employees earning around $70,000 each and owes roughly $420 in federal unemployment tax. The second spread that money across forty five short stints and owes closer to $1,890. Same payroll, four and a half times the tax.
Hardly anyone points this out, because the rate is genuinely small and the acronym is genuinely boring. But the mechanism matters: this is one of the few taxes in the US system that charges you for churn rather than for compensation, and the businesses it hits hardest are restaurants, retail, agriculture, home care, and anyone else running a revolving door.
Along the way I cover what the acronym means, the three tests that decide whether you owe anything, how to calculate the number correctly, what a credit reduction state does to your January, and how the return and deposit rules work. I build employee record and onboarding tooling for businesses without an HR department at FirstHR. FirstHR is an onboarding and HR platform, not a payroll provider.
What FUTA Is
FUTA is a federal tax that employers pay on a slice of each employee's wages to fund the unemployment insurance system. It is not withheld from anyone's paycheck, it is not matched by employees, and the money does not go to your own former employees directly.
The split between federal and state is the part that confuses people. Your former employee's weekly unemployment check comes from your state's fund, which is financed by your state unemployment tax.
The federal tax pays for the machinery. According to the Department of Labor, it covers the cost of administering unemployment insurance and the job service in every state, pays half the cost of extended benefits during periods of high unemployment, and maintains the fund states borrow from when claims outrun contributions. Two taxes, two destinations, one event.
That structure explains something otherwise puzzling. The federal tax barely moves, since the wage base has sat at $7,000 since 1983 and the net rate has been 0.6 percent since mid 2011. Your state rate, by contrast, moves every year based on your own layoff history.
When employers talk about unemployment tax getting expensive after a round of layoffs, they are almost always talking about the state side. The federal side only becomes expensive under a few specific conditions, covered below.
What FUTA Stands For
FUTA stands for the Federal Unemployment Tax Act. In payroll, tax, and accounting contexts the acronym always refers to this law, and it is pronounced as a word rather than spelled out.
The tax began as Title IX of the Social Security Act of 1935. According to the Congressional Research Service, a law of February 10, 1939 moved it into the Internal Revenue Code, and the Social Security Amendments of 1939 gave it the name Federal Unemployment Tax Act. It is codified today at sections 3301 through 3311 of the Code.
The constitutional question about whether Congress could tax employers to push states into building unemployment systems was settled by the Supreme Court in 1937, in a case brought by an Alabama company against the federal collector.
The design is deliberately coercive, and it is worth understanding because it explains the credit that dominates the arithmetic. Congress set a high federal tax and then offered employers a large credit for contributions to a state unemployment fund that meets federal standards.
States that did not build a conforming system would see their employers pay the full federal rate with nothing coming back to the state. Every state built one. What remains today is a headline rate almost nobody pays and a discount almost everybody gets.
Who Pays FUTA Tax
Employers pay FUTA, and only employers. Employees pay nothing toward it, and the Form 940 instructions tell employers not to collect or deduct it from wages. Whether your business owes it at all comes down to three tests, and meeting any one of them is enough.
The IRS guidance on Form 940 filing requirements spells out the general test with a detail that trips people up: the lookback covers the current year and the prior year. A business that hit $1,500 in a single quarter last year is liable this year even if this year is quiet. Liability is sticky in a way that quarterly payroll taxes are not.
A few situations that come up constantly at small businesses:
| Situation | Subject to FUTA? | The reasoning |
|---|---|---|
| Owner of an S corporation paying themselves W-2 wages | Yes | Officer compensation is wages. The owner is an employee of the corporation for payroll purposes |
| Sole proprietor taking an owner's draw | No | A draw is not wages and the owner is not an employee of the business |
| Partner receiving guaranteed payments | No | Partners are not counted as employees for FUTA, and guaranteed payments are not wages |
| Child under 21 working in a parent's sole proprietorship | No | Family employment exemption, which disappears if the business is a corporation |
| Spouse employed in the other spouse's sole proprietorship | No | Same family employment exemption, same corporate exception |
| Part time and seasonal staff | Yes | No minimum hours or tenure. Wages count from the first dollar |
| Properly classified independent contractor | No | Not an employee, so no FUTA. Misclassification reverses this retroactively |
| Employee of a 501(c)(3) nonprofit | Generally no | Exempt organizations are outside FUTA, though state unemployment obligations usually remain |
The contractor row carries the most risk. FUTA is one of several taxes that reappear when a classification is overturned, alongside the employer share of Social Security and Medicare, income tax withholding exposure, and state unemployment contributions.
If you rely heavily on 1099 workers, the question of employee versus contractor status is worth settling before an audit settles it for you, and the cost of getting classification wrong compounds across every year the arrangement ran.
If you use a staffing agency or a professional employer organization, the answer depends on the arrangement. Workers supplied by a staffing agency are usually that agency’s employees and appear on its return rather than yours. Under a co-employment arrangement the paperwork can go either way, and organizations certified by the IRS are permitted to file on behalf of their client employers.
Confirm in writing which entity files and which one carries the liability. The client business does not automatically stop being an employer for tax purposes just because someone else runs the payroll.
Nick Anisimov, FirstHR founderThe Rate and Wage Base
The statutory FUTA rate is 6.0 percent on the first $7,000 of each employee's wages for the calendar year, and the credit for state unemployment tax brings most employers down to an effective 0.6 percent. That is a maximum of $42 per employee per year.
Two properties of the wage base matter more than the rate itself.
First, the base is per employee, per employer, per calendar year. If someone earns $200,000 from you, only $7,000 of it is subject to FUTA. If someone earns $5,000, all $5,000 is subject. The base resets every January regardless of tenure, so a ten year employee generates the same $42 as a brand new hire.
Second, the base does not reset when someone quits and comes back to the same employer in the same year. Wages you already counted stay counted. But if that person goes to work somewhere else, the new employer starts a fresh $7,000 base for them.
Two employers, two wage bases, same worker, same year. That is a feature of the design rather than a loophole, and it is why the total federal unemployment tax collected on a mobile workforce is higher than the tax on a stable one.
How to Calculate It
The calculation is four steps, and the error to watch for is applying the $7,000 cap to total payroll instead of to each person individually.
A worked example for a small operation with an owner on payroll, one full time employee, one part timer, and one seasonal hire:
| Person | Gross wages | FUTA exempt | Taxable after exemptions | Counted after the cap |
|---|---|---|---|---|
| Owner on W-2 through an S corporation | $60,000 | $0 | $60,000 | $7,000 |
| Full time employee | $48,000 | $3,600 in health premiums | $44,400 | $7,000 |
| Part time employee | $9,000 | $0 | $9,000 | $7,000 |
| Seasonal hire, six weeks | $4,200 | $0 | $4,200 | $4,200 |
| Total FUTA taxable wages | $121,200 gross | $25,200 |
At the standard 0.6 percent, that business owes $151.20 in federal unemployment tax for the year. Because the total stayed under $500, no quarterly deposit was required at any point and the whole amount is paid with the annual return.
In a state with a 1.2 percent credit reduction, the same payroll produces an effective 1.8 percent rate and a bill of $453.60, still under the deposit threshold but three times the cost.
Why Turnover Raises It
FUTA is charged per head rather than per payroll dollar, which means the same wage bill produces very different tax depending on how many people it passed through. It is the single most useful thing to understand about the tax, and the one most explanations leave out.
The mechanism is simply the wage base. Once someone crosses $7,000, every additional dollar you pay them is free of federal unemployment tax. Concentrating payroll in fewer, longer tenured people minimizes the tax. Spreading it across many short stints maximizes it.
| Business | Annual wage bill | People paid during the year | FUTA taxable wages | Tax at 0.6% |
|---|---|---|---|---|
| Professional services firm | $700,000 | 10 employees, all full year | $70,000 | $420 |
| Restaurant with heavy churn | $700,000 | 45 people cycled through | $315,000 | $1,890 |
| Retail with seasonal peaks | $700,000 | 28 people, mixed tenure | $185,000 | $1,110 |
| Home care agency | $700,000 | 60 caregivers, many part time | $372,000 | $2,232 |
Those are illustrative rather than survey figures, and the exact taxable wage totals depend on how much each person earned before leaving. The direction is not in doubt, though: the churn heavy business pays several times the federal unemployment tax on the same money.
Add the state side, where a claims history also drives up your experience rate (the state tax rate that tracks your layoff record), and the combined unemployment cost of a revolving door is meaningfully larger than the headline rates suggest.
This is where a payroll line item turns into an operations question. The federal portion is small in absolute terms, but it is a clean, unarguable proxy for how many people entered and left your business, sitting right there on a tax return.
If you already track what turnover costs you, the FUTA figure is a useful cross check, because unlike most turnover estimates it is not modeled. It is what you actually paid.
That fresh start for a new employer has one important exception, and it matters to anyone buying a business. If you acquire a company and keep its employees, the Form 940 instructions treat you as a successor employer. You may then count the wages the previous owner already paid those people toward their $7,000 base for the year, provided that owner was itself required to file the return.
On the return, you check the successor employer box and carry those wages forward rather than starting from zero. Skipping this step means a straightforward overpayment, and it is easy to overlook because an acquisition usually means a new payroll system with no prior year to look at.
How You Lose the Credit
There are three ways to end up paying more than 0.6 percent, and only one of them is outside your control. Paying state unemployment tax after the federal return is due costs you part of the credit. Paying wages that your state does not cover at all costs you the credit entirely on those wages. Operating in a credit reduction state costs you a slice of it regardless of what you do.
| What happened | What you keep | Effective rate on the affected wages |
|---|---|---|
| State unemployment paid in full by the Form 940 due date | The full 5.4 percent credit | 0.6 percent |
| State unemployment paid after the Form 940 due date | 90 percent of the credit those late payments would have earned | Above 0.6 percent, calculated on a worksheet |
| Some wages not covered by your state unemployment law | No credit on the uncovered wages | 6.0 percent on that portion |
| No wages at all covered by state unemployment law | No credit | 6.0 percent on everything |
| Wages in a credit reduction state | 5.4 percent less the state's reduction | 0.6 percent plus the reduction |
| A state experience rate below 5.4 percent | The full 5.4 percent credit | 0.6 percent |
That last row is the one that reassures people and almost never gets said out loud. A new business or a business with no claims history often has a state unemployment rate well under 5.4 percent, sometimes closer to one percent.
You do not lose federal credit for paying less state tax. An additional credit makes up the difference between what you actually paid and what 5.4 percent would have been, so a low state rate is a pure saving rather than a trade.
The second row is entirely within your control. State payments made after the federal return is due are not forgiven, but they are not fully penalized either: under 26 U.S.C. 3302(a)(3) they still earn 90 percent of the credit they would have earned had they arrived by then. The arithmetic runs through a worksheet in the form instructions rather than a single line.
The third and fourth rows catch a narrower group. Some states exclude particular categories of worker, most commonly corporate officers or specific occupations, from state unemployment coverage. Those wages remain fully subject to federal unemployment tax with no state credit against them, so the effective rate on that portion is the full 6.0 percent.
Credit Reduction States
A credit reduction state is one that borrowed from the federal unemployment account and did not repay within the allowed window. Employers in that state lose part of the 5.4 percent credit, so their effective rate climbs above 0.6 percent.
According to IRS guidance on the credit reduction, the reduction is 0.3 percent for the first year a state is a credit reduction state and another 0.3 percent for every year after that until the loan is repaid. A further reduction, called an add on, can apply once the balance has survived several consecutive years, and states sometimes receive relief from it.
The Department of Labor publishes both the potential list and the final determination, and the timing is the operationally important part: the final list is not settled until after November 10 of the tax year it applies to.
| Tax year | Jurisdiction | Credit reduction | Effective FUTA rate | Maximum per employee |
|---|---|---|---|---|
| 2025 | California | 1.2% | 1.8% | $126 |
| 2025 | U.S. Virgin Islands | 4.5% | 5.1% | $357 |
| 2025 | Connecticut and New York, repaid before the deadline | None | 0.6% | $42 |
| 2025 | All other states | None | 0.6% | $42 |
For the 2025 tax year, California and the U.S. Virgin Islands were the only jurisdictions affected. Connecticut and New York had appeared on the potential list earlier in the year and repaid their outstanding balances before the November 10 deadline, so their employers stayed at the standard rate.
California's benefit cost rate add on was waived, which kept its 2025 reduction at 1.2 percent against a potential 4.6 percent. The Virgin Islands' 4.5 percent matched its potential figure, which carried no add on.
For tax year 2026, the Department of Labor again listed California and the U.S. Virgin Islands as potentially subject to a reduction, with the Virgin Islands at 4.8 percent. Treasury data shows the Virgin Islands repaid its advance (the federal loan) in full by April 30, 2026, which puts it on track to avoid a reduction if its balance stays at zero through November 10.
California is the one to watch: it still owed about $19.3 billion on September 22, 2026. The department estimates 1.5 percent for the outstanding advance plus a 3.8 percent benefit cost rate add on, a potential total of 5.3 percent.
California's add on can be waived, as it was for 2025, and none of this is final until after the November deadline. Until then, treat the higher figure as your planning number rather than assuming the lower one.
Two details catch multi state employers. A credit reduction follows the state where the work was performed, not where your business is registered, so a company headquartered in a clean state with three remote employees in an affected one still owes the higher rate on those three.
The second detail is Schedule A. Any employer with wages in more than one state files it with the return, whether or not a reduction applies. If you are running payroll across state lines, this is the schedule that most often gets missed.
FUTA vs SUTA vs FICA
Three payroll taxes get confused with each other constantly because they appear on the same reports and sound alike: FUTA, SUTA (state unemployment tax), and FICA (Social Security and Medicare). They differ on who pays, what the money does, and how the rate is set.
| FUTA | SUTA | FICA | |
|---|---|---|---|
| Who pays | Employer only | Employer only in most states | Employer and employee split |
| What it funds | Administration of the unemployment system and the federal loan account | Actual unemployment benefits paid to your former employees | Social Security and Medicare |
| Rate | 6.0% less a credit of up to 5.4% | Set by your state, varies with your claims history | 6.2% plus 1.45% on each side |
| Wage base | First $7,000 per employee | Set by state, ranging from $7,000 to well over $50,000 | Capped for Social Security, uncapped for Medicare |
| Filed on | Form 940, annually | State return, usually quarterly | Form 941, quarterly |
| Withheld from pay | Never | Almost never | Yes, the employee share |
| Moves with your behavior | Only through headcount and the state credit | Yes, through your experience rating | No |
The relationship between the first two is the one worth understanding. Your state unemployment tax is the one that responds to your layoff history and the one that gets genuinely expensive, with wage bases in some states many times the federal $7,000. The federal tax mostly sits still.
Paying the state tax in full, and before the federal return is due, is what keeps the federal one at 0.6 percent. That links the two in a way that Social Security and Medicare taxes are not linked to anything.
The rate line in that table hides the most detail. FUTA has one national rate that applies to every employer in the country. Your state rate is assigned to your business individually: new employers get a flat starting rate set by the state, often varying by industry, and once you have enough history the state moves you onto an experience rate driven by the benefits charged to your account.
Each state also sets its own taxable wage base, which is why the same employee can generate several times more state unemployment tax than federal. If you need both figures for a budget, use $42 per head for the federal side and take your assigned rate and wage base from the annual notice your state agency sends, since the state tax is the half that actually moves.
All three are employer obligations that show up on different forms with different cadences, which is the practical argument for keeping them on a single compliance calendar rather than reacting to each filing notice as it arrives.
Dwight SchruteSales3 people
Darryl PhilbinWarehouse1 person
Kelly KapoorCustomer Service1 personForm 940 and Deposits
You report FUTA once a year on Form 940, due January 31 for the prior calendar year, but you may have to deposit the tax quarterly before you ever file. Those are two separate obligations with two separate deadlines, and conflating them is a common filing error.
The deposit rule works on a running total rather than on each quarter in isolation. If your undeposited liability is $500 or less at the end of a quarter, you carry it forward. Once the cumulative figure passes $500, you deposit by the last day of the following month. If the annual total never passes $500, you simply pay it with the return. All federal deposits must go through electronic funds transfer.
When January 31 falls on a weekend or a legal holiday, the return deadline moves to the next business day. Employers who deposited all of their FUTA tax for the year on time earn an extended filing date of February 10, which is a small but real reward for keeping the deposit schedule clean. Paying any of the tax with the return keeps the January 31 date, even when the total for the year was too small to require a deposit.
On mechanics: you can file electronically through an authorized provider or on paper, and the mailing address depends on your state and on whether a payment is enclosed. If your total for the year came in at $500 or less, you can send the payment with the return using the payment voucher rather than going through the deposit system.
Two filing details catch people out. If you paid wages in more than one state, or in any state on the credit reduction list, the return needs the multi state schedule attached. Filing is required every year you meet one of the three tests, including years when the tax works out to zero.
Household employers sit outside all of this. They report federal unemployment tax on Schedule H with their personal return under the rules in IRS Publication 926, unless they also have business employees and choose to include the household tax on Form 940.
Every figure that return asks for comes from the same three places, and they are worth keeping in one workbook across the year rather than assembling in the last week of January.
| A | B | C | D | E | F | G | H | I | J | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Employee | Hire date | Separation date | Gross wages YTD | FUTA exempt wages | FUTA taxable wages | Capped at 7000 | State for SUTA | Credit reduction state | Notes |
| 2 | Example: full year employee | 48000 | 3600 | 44400 | 7000 | No | Section 125 premiums excluded | |||
| 3 | Example: part time | 9000 | 0 | 9000 | 7000 | No | ||||
| 4 | Example: seasonal | 4200 | 0 | 4200 | 4200 | No | Under the wage base, taxed in full | |||
| 5 | ||||||||||
| 6 | ||||||||||
| 7 | ||||||||||
| 8 | ||||||||||
| 9 | ||||||||||
| 10 | ||||||||||
| 11 | ||||||||||
| 12 | TOTAL | Sum the capped column |
The first sheet is the calculation itself, with separate columns for gross wages, exempt payments, and the capped amount, so the per person cap is applied where it belongs rather than at the bottom of a total.
The second sheet tracks the running liability against the $500 threshold quarter by quarter, including a row for the credit reduction true up (the catch-up payment) that lands in Q4. The third is the pre filing checklist, which exists because the items that delay a Form 940 are almost always missing inputs rather than difficult math.
The IRS asks you to keep employment tax records for at least four years after filing for the fourth quarter of the year. That means payroll registers, the wage detail behind your taxable figure, deposit confirmations, and the filed return itself.
The same retention logic applies to the rest of your payroll records, and keeping them in one place rather than scattered across a payroll provider, a bank, and a shoebox is what makes a notice a fifteen minute task instead of a week.
Penalties for Late Filing
Late FUTA filings and deposits carry the same penalty schedules as much larger employment taxes, which means the percentages look alarming even though the dollar amounts on a small federal unemployment bill rarely are. A late state payment can cost more than the federal penalty itself: once the Form 940 due date passes, a state contribution earns only 90 percent of the credit.
One detail worth knowing from the IRS failure to deposit penalty rules: the tiers replace each other rather than stacking.
| Failure | Penalty | How it accumulates |
|---|---|---|
| Filing the return late | 5 percent of the unpaid tax for each month or part month | Capped at 25 percent of the unpaid tax |
| Deposit 1 to 5 days late | 2 percent of the deposit | Applied to the late deposit amount |
| Deposit 6 to 15 days late | 5 percent of the deposit | Applied to the late deposit amount |
| Deposit more than 15 days late | 10 percent of the deposit | Applied to the late deposit amount |
| Deposit unpaid more than 10 days after the first IRS notice | 15 percent of the deposit | Replaces the lower tier once a notice is issued |
| Paying the tax late | A monthly charge on the unpaid balance | Runs alongside the filing penalty, with interest |
Put a real number on it. Take a twenty person business that owes $840 in federal unemployment tax and files three months late without paying. Its late filing and late payment penalties come to about $126 combined, before any deposit penalty.
A late state payment costs that business more. Suppose its state rate is 2.7 percent on a $7,000 state wage base and every state payment lands after the federal return was due. Those payments keep only 90 percent of their credit, which means $18.90 more federal tax per employee, or $378 across twenty people. The penalties are the visible cost and, here, the smaller one.
Two practical notes. If you discover an error after filing, the correction goes on the amended version of the return rather than a fresh original, and it needs an explanation of what changed. And if you are closing the business or have stopped paying wages, mark the return final so the IRS stops expecting one, since a missing return generates notices long after there is anyone left to answer them.
Wages That Are Exempt
Not every dollar you pay an employee is subject to FUTA. A handful of payment types come out before you apply the wage base, and getting this wrong in either direction is common.
The special rules table in IRS Publication 15 is the authority, and it lists income tax withholding, Social Security and Medicare, and FUTA in separate columns because a payment can be exempt from one and taxable under another.
| Payment type | Subject to FUTA? | Note |
|---|---|---|
| Employee contributions to a cafeteria plan | No | Health, dental, and vision premiums taken pre tax under Section 125 are excluded |
| Employer contributions to a retirement plan | No | The employer match or profit sharing contribution is outside FUTA |
| Employee elective deferrals to a 401(k) | Yes | Exempt from income tax withholding but still subject to FUTA. This one surprises people |
| Group term life insurance | No | Employer paid coverage is excluded from FUTA wages |
| Dependent care assistance within limits | No | Excluded up to the statutory cap |
| Bonuses and commissions | Yes | Ordinary wages for this purpose |
| Tips reported by the employee | Yes | Tips an employee reports to you in writing at $20 or more in a month are subject to FUTA |
| Reimbursements under an accountable plan | No | Not wages at all, provided the plan is genuinely accountable |
| Severance pay | Yes | Generally treated as wages for FUTA |
The 401(k) row is the one that most often produces a wrong number. Elective deferrals are excluded from federal income tax withholding, which leads people to assume they are excluded from everything, but they remain subject to federal unemployment tax and to Social Security and Medicare. If your payroll deduction setup treats all pre tax deductions identically, this is worth checking before year end rather than after a notice.
On the employer side, section 501(c)(3) organizations and government entities are generally outside FUTA entirely. Nonprofits usually still participate in state unemployment insurance, often by reimbursing the state for benefits actually paid rather than by paying a contribution rate, which is a materially different arrangement and one that nonprofit employers should confirm with their state agency rather than assume.
Common Mistakes
The errors repeat across businesses of every size, and most of them are structural rather than arithmetic.
| Mistake | What it looks like | The fix |
|---|---|---|
| Applying the wage base to total payroll | Capping the whole company at $7,000 instead of each person | Cap employee by employee, then sum. This is a frequent source of understatement |
| Withholding it from employees | FUTA appearing as a deduction on a pay stub | Remove it immediately. It is an employer tax, and the IRS instructions say not to collect or deduct it from wages |
| Omitting people who left mid year | Working from the current roster instead of the full year register | Pull everyone paid at any point during the year, including one week hires |
| Paying state unemployment late | Treating the state deposit as lower priority during a cash squeeze | Pay it by the Form 940 due date at the latest. Contributions paid after that date earn only 90 percent of the credit |
| Assuming the credit reduction will not apply | Budgeting 0.6% all year in an affected state | Accrue the higher rate from January and release it if the state repays |
| Skipping Schedule A | Filing a plain 940 with wages in two or more states | Any multi state payroll requires Schedule A, whether or not a reduction applies |
| Excluding 401(k) deferrals | Treating all pre tax deductions the same way | Employee deferrals stay in FUTA wages. Employer contributions come out |
| Missing the deposit threshold quietly | Growing past twelve employees and not noticing the $500 line | Track the running liability quarterly rather than checking once at year end |
The last one deserves emphasis because it arrives with growth. A business that has always paid its federal unemployment tax with the return does not get a notification when it crosses into deposit territory. It simply becomes late, and the penalty is calculated on a deposit nobody knew was due.
Reviewing the running total alongside your regular payroll reconciliation catches it, and reviewing it as part of a broader payroll audit catches the classification and exemption issues at the same time.
None of this is difficult once you understand the wage base correctly. What makes FUTA an outsized source of small business errors is that the number is small enough to ignore and structured differently from every other payroll tax on the same report.
Check the running total each quarter and give the return a proper review before you file. With a clean set of payroll records, that annual review takes an hour instead of a weekend.
Frequently Asked Questions
What does FUTA stand for?
FUTA stands for the Federal Unemployment Tax Act. The tax itself dates to the Social Security Act of 1935 and picked up its current name in the Social Security Amendments of 1939; today it sits in the Internal Revenue Code. Its revenue pays to run state unemployment insurance programs and keeps up the federal account that states borrow from when their own unemployment funds run dry. Whenever the acronym shows up in payroll, tax, or accounting, it means this law. Employers pay it, employees never do, and it is reported once a year on IRS Form 940.
Who pays FUTA tax, the employer or the employee?
The employer pays it, entirely. FUTA is not withheld from wages and it is not a shared tax the way Social Security and Medicare are. Taking it out of an employee's paycheck is a real error, not a bookkeeping quirk: the IRS instructions for Form 940 expressly tell employers not to do it. This is a common misunderstanding about the tax, largely because it sits next to withheld taxes on payroll reports and gets mentally filed alongside them. If a payroll summary shows FUTA reducing net pay, something is set up wrong and needs fixing before the next run.
What is the FUTA tax rate?
The law sets the rate at 6.0 percent, charged on the first $7,000 you pay each employee in a calendar year. Almost no one pays that full rate, because employers who pay their state unemployment tax in full by the due date of their annual FUTA return earn a credit of up to 5.4 percent. That credit leaves a net rate of 0.6 percent, which works out to no more than $42 per employee per year. Employers in credit reduction states pay more, since part of the 5.4 percent credit is taken away.
How do I calculate FUTA tax?
Start with total wages paid to each employee for the year, subtract any payments that are exempt from FUTA, then cap the result at $7,000 per person. Add the capped amounts together to get your total FUTA taxable wages, and multiply by your effective rate, normally 0.6 percent. The per person cap is where calculation errors tend to come from: it applies to each employee individually rather than to your payroll as a whole, so a business with many low earning or short tenured people has proportionally more taxable wages than payroll size alone suggests.
What is a FUTA credit reduction state?
It is a state that took a loan from the federal unemployment account to keep paying benefits and has carried the balance past the repayment window. Its employers lose a slice of the 5.4 percent credit, which lifts their effective FUTA rate above 0.6 percent on wages paid in that state. The Department of Labor does not settle the final list until after November 10 each year, so the extra cost is confirmed late and counts as a fourth quarter liability. For the 2025 tax year, the only jurisdictions affected were California and the U.S. Virgin Islands.
When is Form 940 due?
Form 940 covers a calendar year and is due January 31 of the following year, moving to the next business day when January 31 falls on a weekend or a legal holiday. Employers who deposited all of their FUTA tax for the year on time get an extended deadline of February 10. If $500 or less is still undeposited at year end, you may pay it with the return instead, but then the return is due by the regular January 31 deadline. Deposits are separate from the return: if your undeposited liability passes $500 at the end of any quarter, you must deposit it electronically by the last day of the following month rather than waiting for the annual filing.
Do I have to pay FUTA on part time and seasonal employees?
Yes. FUTA does not distinguish between full time, part time, temporary, and seasonal staff. Every employee's wages count toward the $7,000 base, and every one of them counts when you apply the 20 week test that determines whether you owe the tax at all. A seasonal worker who earned $3,000 generates FUTA on the full $3,000 rather than on nothing. Independent contractors are genuinely outside the tax, but only when the classification would survive scrutiny.
Are any employers exempt from FUTA?
Yes. Section 501(c)(3) nonprofit organizations and government entities are generally exempt from FUTA, though they usually still have state unemployment obligations and often reimburse the state for benefits paid rather than paying a tax. Certain family employment is also outside the tax: wages paid to a child under 21, a spouse, or a parent working in a sole proprietorship are generally exempt, but that exemption disappears once the business is a corporation. Religious organizations and some tribal entities have their own rules.
What happens if you do not pay FUTA tax on time?
A late return costs 5 percent of the tax still owed for every month or partial month it is overdue, up to a maximum of 25 percent. Late deposits are penalized on a sliding scale that begins at 2 percent for a deposit no more than five days late and reaches 15 percent if the amount is still unpaid ten days after the IRS sends a notice and demand. Interest runs alongside. On a small federal unemployment bill these penalties rarely amount to much in dollars, and a state unemployment payment that misses the federal return's due date can end up costing more than the federal penalty does.
Do household employers file Form 940?
Generally no. A family that employs a nanny, housekeeper, or in home caregiver reports federal unemployment tax on Schedule H, which is attached to the personal income tax return, so no annual employer return is filed. The trigger is different too: cash wages of $1,000 or more in any calendar quarter of the current or prior year rather than the $1,500 business figure. There is one exception worth knowing. A household that also employs people in a trade or business may choose to carry the household tax on Form 940 alongside everyone else, provided it files the matching quarterly or annual return for withholding, Social Security, and Medicare.
What happens if I pay my state unemployment tax late?
Part of the 5.4 percent federal credit is at risk, but only if the payment arrives after your federal return is due. The credit depends on the state tax being paid in full by that filing deadline rather than by the quarterly date your state sets, so a payment a few weeks behind schedule still earns the full credit as long as it lands before then. Anything paid later earns 90 percent of its normal credit. In the worst case, that raises your federal cost from $42 to $79.80 per employee, and on a lower state rate the additional credit keeps the loss smaller. Your state can also charge its own late penalty and interest. If a tight week ever forces you to pick which payroll tax deposit to make first, keep the Form 940 due date in view: a state payment that slips past it gives up part of a credit worth nine times the 0.6 percent you actually pay.
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