Definition
A federal payroll tax paid solely by employers that funds the federal unemployment insurance system, providing temporary income to workers who lose their jobs through no fault of their own.
US Context
FUTA applies to all US employers who pay $1,500 or more in wages in any calendar quarter or who had at least one employee for any part of a day in 20 or more different weeks. Most employers pay an effective rate of 0.6% due to the state credit. Credit reduction states vary from year to year — employers should check the DOL's annual list. The low wage base of $7,000 (unchanged since 1983) means FUTA is most impactful for employers with many lower-wage or part-time employees.
Best Practices
- Deposit FUTA taxes quarterly when the accumulated liability exceeds $500
- File Form 940 annually by January 31 and check for credit reduction states that increase the effective rate
- Track each employee's cumulative wages to stop FUTA accrual once the $7,000 wage base is reached
- Monitor state borrowing status — credit reduction states increase FUTA costs
Frequently Asked Questions
Do employees pay FUTA tax?
No. FUTA is an employer-only tax. It is never deducted from employee wages. The employer pays the full FUTA tax based on employee wages up to the annual wage base.
What is the effective FUTA rate?
The gross rate is 6.0% on the first $7,000 per employee per year. With the standard 5.4% state credit, the effective rate is typically 0.6%, or a maximum of $42 per employee per year. Credit reduction states may result in a higher effective rate.
What is a FUTA credit reduction state?
A state that has borrowed from the federal unemployment trust fund and not repaid the loans within the required timeframe. Employers in these states receive a reduced FUTA credit, increasing their effective FUTA rate. The DOL publishes the list of credit reduction states annually.