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Takeaway
The Federal Unemployment Tax Act (FUTA) helps generate funding for unemployment benefits. These benefits help financially support individuals who abruptly lose their jobs. However, FUTA creates a tax that also affects a majority of employers in the U.S. Read how FUTA taxes work, how FUTA tax liability is calculated and how businesses use IRS Form 940 to pay and file their FUTA taxes.
Unemployment benefits are a lifeline for people who abruptly lose their jobs. As of November 2024, the national unemployment rate hovers at 4.2%, according to the Bureau of Labor Statistics. In other words, 7.1 million Americans could potentially rely on or qualify for unemployment insurance.
But funding for these programs doesn’t appear out of nowhere. The source? The Federal Unemployment Tax Act (FUTA), a law that requires employers to fund state unemployment benefits alongside their preexisting payroll taxes.
Let’s explore how this crucial law works, the current FUTA rates and how your organization can comply with confidence.
What is FUTA (Federal Unemployment Tax Act)?
FUTA generates money for national unemployment programs through taxes imposed on nearly any business with more than one worker. Signed under the Social Security Amendments of 1939, FUTA has been a compliance requirement for organizations nationwide for nearly a century.
Notably, FUTA taxes fall on employers, not their staff. However, FUTA rates must be derived from employees’ wages. Additionally, the IRS doesn’t collect FUTA taxes every pay period or month. Instead, and similar to other employer payroll taxes, FUTA is paid quarterly or annually.
Without FUTA, state unemployment agencies would suffer a significant blow and would likely have to drastically reduce the benefits they provide. While FUTA isn’t necessarily the sole source of funding for state unemployment programs, it creates a meaningful foundation from which they can operate.
2025 FUTA tax rate
The current FUTA tax rate is 6% of the first $7,000 a business pays to an employee each year. Likewise, enterprises and larger employers can expect to pay more FUTA taxes, though their rate per worker won’t change. While the initial $7,000 is known as the “FUTA wage base,” a State Unemployment Tax Act (SUTA) may modify this base.
Plus, employers that pay their federal and state unemployment taxes in full may have the opportunity to earn a tax credit worth up to 5.4% of their FUTA taxable wages. This credit can potentially reduce a company’s FUTA tax burden to just 0.6%. Regardless, businesses must report their FUTA tax through Form 940.
The FUTA tax rate doesn’t change every year. In fact, the net FUTA tax rate has only increased three times since it was established at 0.3% in 1939. Here’s how this rate has shifted over the last century:
| Net FUTA tax rate since 1939 | |
| 1939 | 0.3% |
| 1965 | 0.4% |
| 1970 | 0.5% |
| 1983 | 0.6% |
When FUTA may change again isn’t clear. Even so, employers should never assume they’re in compliance even with a familiar, long-standing law. Always consult a licensed tax professional to ensure your organization complies with FUTA and any other tax requirement.
FUTA tax requirements
In addition to paying any applicable state unemployment taxes, most businesses must comply with FUTA. Even so, the IRS proposes three tests to help confirm if your business must pay FUTA taxes.
1. General test
Using the general test, employers check if they paid any employees who aren’t household or agricultural workers $1,500 or more in wages during any calendar quarter of the previous or current tax year. Additionally, organizations must verify if they had one or more employees for at least a portion of a day across 20 different weeks during the same time frame.
2. Household employees test
FUTA maintains one primary exception for household workers, which include:
- housekeepers
- babysitters
- gardeners
- and other employees who perform household work at, or upkeep, a private residence
Keep in mind plumbers, renovation specialists and other similar workers are considered independent contractors, not employees.
Regardless of a household employee’s exact role, their employer may owe FUTA taxes if they were paid more than $1,000 in cash wages in any calendar quarter of the tax year.
3. Agricultural employees (farmworkers) test
While notably laxer than businesses outside agriculture, farms and other operations within the sector may still be covered by FUTA if a farmworker was paid at least $20,000 during any quarter of the applicable tax year. FUTA may also apply to agricultural organizations that employed at least 10 workers for a portion of the day for at least 20 or more weeks during the tax year.
How do employers calculate FUTA tax?
FUTA tax calculations are derived from the first $7,000 of nonexempt wages paid to a covered employee. FUTA is taken at a rate of 6% — though this may be reduced to 0.6% if the affected employer receives a full, 5.4% FUTA tax credit.
To simplify our example, let’s assume you have two employees and don’t qualify for a tax credit. The first employee made $30,000 in nonexempt wages, whereas the other joined your company late and just earned $4,000. Remember, FUTA will only apply to $7,000 of the first employee’s wages. The second worker’s wages, however, will be covered by FUTA in their entirety.
To determine your hypothetical company’s total FUTA tax liability, we need to combine the covered wages of both employees and multiply it by 6%. This can be framed in the following formula:
FUTA liability = ($7,000 of the first employee’s wages + $4,000, the second employee’s total wages) x 6%
In this scenario, your company’s entire FUTA liability would be $11,000 (the sum of both employees’ eligible wage) multiplied by 6%, or $660. Assuming your company did receive a full tax credit of 5.4%, wages could be multiplied by 0.6% instead. Thus, your organization’s FUTA liability would only be $66.
Who is subject to FUTA taxes?
Though employee wages help determine FUTA tax liability, employers are responsible for paying it. FUTA differs from similar acts — like the Social Security Act — which applies to both organizations and their employees. While these laws serve a similar purpose, it might help to consider the unemployment programs that FUTA supports as an emergency fund. Social Security, on the other hand, is often administered as retirement income (excluding those who receive Social Security income for a disability).
How do businesses file FUTA taxes?
Businesses use IRS Form 940 to pay and file their FUTA taxes for the applicable year. The four-page form requires your company’s:
- employer identification number
- name and trade name (if any)
- address
Employers must also specify if the FUTA tax return is final, amended or relevant at all in the event no wages were paid for the tax year. Employers must also specify if they paid a state unemployment tax and if their FUTA tax liability is impacted by a tax credit.
Afterward, businesses should specify the total wages that were paid to employees, followed by any payments exempt from FUTA. Form 940 also requires confirmation of the total wages paid over the first $7,000 to each employee, even though this amount may not be taxed.
Form 940 then walks employers through adjustments and FUTA tax liability by quarter, which range from:
- Jan. 1 to March 31
- April 1 to June 30
- July 1 to Sept. 30
- Oct. 1 to Dec. 31
You must also provide the name and phone number of any third-party designee — like a payroll provider — that is authorized to speak to the IRS on your behalf.
Finally, Form 940 includes a payment voucher to mail alongside your total tax amount and a notice about the Privacy Act and the Paperwork Reduction Act.
Payment dates to deposit FUTA
Form 940 covers a calendar year, but employers may need to make FUTA tax deposits before filing. If your annual FUTA tax liability exceeds $500, you must make at least one quarterly deposit. If your quarter liability is $500 or less, carry it forward until the cumulative total exceeds $500. Then deposit it by the next quarterly due date. Quarterly deposit due dates are:
- April 30
- July 31
- Oct. 31
- Jan. 31
Remember to file Form 940 by Jan. 31 each year. If you’ve made all quarterly deposits on time, the deadline extends to Feb. 10.
Who is exempt from paying FUTA taxes?
Again, while FUTA covers most businesses, it applies differently to household and agricultural employers. And since Dec. 21, 2000, FUTA taxes don’t apply to tribal entities. However, these businesses may still be subject to taxes applied by state or local unemployment laws. FUTA may also not apply to tax-exempt organizations like charities and religious institutions, as well as state and local government parties.
FUTA credit reduction states for 2025
If a state borrows from the federal government to fund its unemployment benefits and fails to repay the loan on time, it becomes a credit reduction state. Employers paying unemployment insurance taxes in those states will have a higher tax due on Form 940. The credit reduction states and rates for 2025 are:
- California: 1.5%
- New York: 1.5%
- Virgin Islands: 4.8%
FUTA vs. SUTA: The difference
FUTA taxes only apply at the federal level, whereas SUTA funds unemployment programs for individual states. Both programs serve a similar purpose and work in tandem to support unemployment initiatives. However, employers and employees may be subject to SUTA taxes. FUTA, on the other hand, only applies to businesses. SUTA taxes may further differ from FUTA in terms of:
- contribution rates
- applicable wage thresholds
- industry-based adjustments
- and more
Consult a local tax professional to verify your company’s exact SUTA liability, especially since this rate may change among the states where you operate. Similarly, exemptions for SUTA may shift on a state-by-state basis.
FUTA vs. FICA: The difference
FUTA taxes fund state and federal unemployment programs, whereas the Federal Insurance Contributions Act (FICA) funds Social Security and Medicare programs. In other words, FUTA helps provide temporary relief to those who have abruptly lost their jobs. FICA taxes, on the other hand, help support retirees, those who qualify for Medicare and people living with disabilities. FICA combines Social Security and Medicare taxes for a total rate of 15.3%, but the cost is split between employers and employees. Specifically, 6.2% of an employee’s FICA taxable wages go to Social Security tax and 1.45% of their FICA taxable wages go to Medicare tax. The employer must match these percentages for a grand total of 15.3%.
Penalties for failing to withhold FUTA taxes
Employers that fail to make FUTA tax deposits on time, in the right amount or in the right way may be subject to the Failure to Deposit Penalty. The penalty amount is based on the number of days your deposit is late, which can range from 2% to 15% of your unpaid deposit.
FAQ
How can a business file its FUTA taxes?
Employers covered by FUTA must use IRS Form 940 to pay and file FUTA taxes. This form also helps employers calculate their exact FUTA tax liability and identify any third-party designee.
How can my business get a FUTA tax credit?
Businesses that meet their state and federal tax obligations timely may qualify for a FUTA tax credit. This credit is worth up to 5.4% of the 6% FUTA tax rate, meaning the full tax credit could reduce an employer’s FUTA tax liability to just 0.6%. Consult a licensed tax professional for more information about how your organization may qualify.
Do employees pay FUTA tax?
No. While employee wages help determine a company’s FUTA tax liability, employers are responsible for paying it.
What is the difference between FUTA and Federal Insurance Contributions Act (FICA) tax?
Whereas FUTA taxes fund unemployment benefits, FICA taxes support Social Security and Medicare programs. In other words, FUTA helps provide temporary relief to those who have abruptly lost their jobs. FICA taxes, on the other hand, help support retirees, those who qualify for Medicare and people living with disabilities.
Is FUTA tax deductible?
Yes, FUTA tax can be reduced via a tax credit of up to 5.4%. Employers that believe they qualify for this credit may declare it on their IRS Form 940 as they prepare to pay and file their FUTA taxes.
Is there a base wage for FUTA?
The current FUTA tax rate is 6% of the first $7,000 a business pays to an employee each year. The initial $7,000 is known as the “FUTA wage base.”
What organizations are exempt from paying FUTA?
Tribal entities are exempt from paying FUTA. Tax-exempt organizations like charities and religious institutions, as well as state and local government parties, may also be exempt.
How often is FUTA tax paid?
FUTA tax is paid quarterly or annually.
Is FUTA withheld from paychecks?
FUTA is not withheld from paychecks because employees do not pay FUTA taxes.
Do self-employed individuals pay FUTA tax?
There is no FUTA tax for self-employed individuals.
Are FUTA and Social Security the same?
No. FUTA taxes fund state and federal unemployment programs, whereas FICA funds Social Security and Medicare programs.
Are FUTA and UI the same thing?
No. FUTA helps pay for the administration of unemployment insurance (UI).
Are nonprofit organizations required to pay FUTA taxes?
Nonprofits that qualify as 501(c)(3) organizations do not have to pay FUTA taxes.
Which form is used to file FUTA taxes?
Businesses use IRS Form 940 to pay and file FUTA taxes.
What is a credit reduction state?
If a state borrows from the federal government to fund its unemployment benefits and fails to repay the loan on time, it becomes a credit reduction state.
Explore Paycom’s payroll tax software to learn how we help lower your liability and lighten your compliance workload.
