Confused about FUTA tax? Learn what FUTA tax is, who pays it, how much it costs, and how to calculate it step by step. Perfect for new employers & beginners.
What Is FUTA Tax? (And How to Calculate It)
If you’ve recently started a business or are digging into your first job’s pay stub, you may have come across a mysterious term: FUTA tax. It’s not something most people hear about in school or even during job training, but it plays a key role in the U.S. unemployment system.
Whether you’re a small business owner, new employer, or curious employee, understanding the FUTA tax is essential. In this guide, we’ll break it down in simple terms, including what FUTA tax is, who pays it, and how it’s calculated.
What Is FUTA Tax?
FUTA stands for the Federal Unemployment Tax Act. It’s a federal tax that employers pay to help fund unemployment compensation programs. This tax provides temporary financial support to workers who have lost their jobs through no fault of their own.
Key Point:
FUTA tax is paid by employers only, not employees. So, if you’re an employee, you won’t see FUTA deducted from your paycheck.
Who Needs to Pay FUTA Tax?
If you’re an employer, you are generally required to pay FUTA tax if:
- You paid $1,500 or more in wages in any calendar quarter of the current or previous year, OR
- You had at least one employee work part of a day in 20 or more different weeks during the year (even if it’s not the same employee).
This includes full-time, part-time, and temporary employees. However, independent contractors don’t count, since they’re self-employed and not considered employees under the law.
What Is the FUTA Tax Rate?
As of the most recent guidance from the IRS:
- FUTA tax rate is 6.0%
- It only applies to the first $7,000 of an employee’s annual wages
- This means that for each employee, the maximum FUTA tax is $420 per year (6% of $7,000).
The FUTA Tax Credit Reduction
Most employers can get a credit of up to 5.4% if they also pay into their state unemployment program on time and in full.
So the effective FUTA tax rate becomes:
6.0% – 5.4% = 0.6%
In most states, that means:
You’ll only pay $42 per employee per year (0.6% of $7,000)
Important:
If your state has borrowed from the federal government to cover unemployment benefits and hasn’t paid it back, it may be a “credit reduction state”, meaning your FUTA credit is smaller, and your tax is higher.
You can check the IRS website annually for a list of these states.
How to Calculate FUTA Tax (Step-by-Step)
Here’s how to calculate the FUTA tax for each employee:
- Determine if the employee has earned more than $7,000 in the year.
- Apply the tax rate (usually 0.6% if full credit is received).
- Only apply the rate to the first $7,000 of wages.
Example:
Let’s say you have 3 employees:
- Alice earns $10,000
- Ben earns $6,500
- Charlie earns $7,000
Assuming you’re eligible for the full credit (0.6% rate):
- Alice: 0.6% of $7,000 = $42
- Ben: 0.6% of $6,500 = $39
- Charlie: 0.6% of $7,000 = $42
Total FUTA tax = $123
When and How Do You Pay FUTA Tax?
Payment Schedule:
FUTA taxes are reported quarterly, but only if you owe more than $500 in accumulated FUTA tax.
If your liability is:
- Over $500/quarter → You must deposit by the last day of the next month.
- $500 or less for the year → You can pay it when you file Form 940 (annual FUTA return).
Reporting FUTA:
Employers must file:
- IRS Form 940 each year (due by January 31st)
You can file electronically or by mail, depending on your business setup.
Common Mistakes to Avoid
- Not keeping track of the $7,000 wage limit per employee
- Forgetting to claim the 5.4% state credit
- Paying independent contractors FUTA — they are not employees
- Missing quarterly deposit deadlines (can lead to penalties)
Is There a FUTA Tax for Self-Employed Workers?
No, self-employed individuals do not pay FUTA tax on their own earnings. FUTA is strictly for employer-paid unemployment contributions. However, if you hire employees, you may owe FUTA on their wages.
Final Thoughts: Why FUTA Tax Matters
FUTA tax may seem like just another cost for business owners, but it plays a crucial role in the larger economic safety net. It ensures that unemployed workers get temporary support during job transitions, which can help stabilize communities and boost long-term employment.
In summary, it’s an employer-only tax. Paid on the first $7,000 of each employee’s wages. After the credit, most employers pay 0.6% or $42 per employee per year. File Form 940 annually and pay quarterly if owed
