What Is FUTA, and How Does Federal Unemployment Tax Work in Payroll?
Published: September 2026 | Last updated: September 2026
Short answer: FUTA stands for the Federal Unemployment Tax Act. It is a federal employer-only payroll tax of 6.0% on the first $7,000 of each employee’s wages per year. Employers that pay state unemployment taxes on time generally receive a credit of up to 5.4%, reducing the net FUTA rate to 0.6% in most states. FUTA is reported on Form 940 and funds the federal portion of the unemployment insurance system.
This tax is not withheld from employees. It is paid entirely by the employer. Most payroll teams calculate it automatically, but understanding the structure, the deposit rules, and the credit reduction risk helps employers avoid surprises at year-end.
What Is FUTA?
FUTA is the Federal Unemployment Tax Act. It establishes a federal payroll tax that employers pay to fund unemployment insurance benefits when workers lose their jobs through no fault of their own. The tax is administered by the IRS and the Department of Labor.
FUTA works alongside the State Unemployment Tax Act (SUTA). Together, they form the unemployment insurance system. States administer unemployment benefit claims and collect state unemployment taxes. The federal FUTA tax funds the federal oversight portion of the system and loans to states that need additional funds to pay benefits.
What This Is
This is an explanation of how FUTA works in payroll: the tax rate, the wage base, the credit for state unemployment taxes, the Form 940 filing requirement, the deposit rules, and what credit reduction means.
It focuses on federal FUTA rules. State unemployment tax rates, wage bases, and rules vary by state and are set separately.
What This Is Not
This is not a guide to state unemployment taxes (SUTA). This is not legal advice. This is not a guide to how to file unemployment claims. This is not a statement that FUTA and SUTA are the same tax.
Who Must Pay FUTA?
An employer is subject to FUTA if it meets either of these tests during the current or preceding calendar year: it paid wages of $1,500 or more in any calendar quarter, or it had one or more employees for at least some part of a day in any 20 or more different weeks. [Last verified: September 2026, per IRS Topic No. 759.]
Household employers are subject to a different threshold. Agricultural employers also have different rules. This article addresses general for-profit and nonprofit employers.
What Is the FUTA Tax Rate?
The gross FUTA tax rate is 6.0%. It applies to the first $7,000 of each employee’s wages per calendar year. Wages above $7,000 are not subject to FUTA. [Last verified: September 2026.]
The $7,000 wage base has not been adjusted by Congress since 1983 and is not indexed to inflation. It remains unchanged as of the date of this article.
The 6.0% gross rate is rarely what employers actually pay. Most employers receive a credit.
What Is the FUTA Credit and Why Does It Matter?
Employers that pay state unemployment taxes (SUTA) on time, in full, and in a state that is not subject to credit reduction receive a credit of up to 5.4% against the gross FUTA rate. That brings the effective net FUTA rate down to 0.6% in most states.
That 0.6% net rate on the $7,000 wage base means a maximum FUTA cost of $42 per employee per year in states with no credit reduction.
The 5.4% credit is sometimes called the “normal credit.” It depends on timely payment. Employers who are late on SUTA payments may lose part or all of the credit for the affected wages.
What Is Credit Reduction?
When a state borrows funds from the federal unemployment trust fund to pay benefits and does not repay the loan within the required timeframe, the IRS reduces the 5.4% FUTA credit available to employers in that state.
Credit reduction increases employers’ FUTA liability. A state in credit reduction for one year loses 0.3% from the normal credit, meaning employers in that state pay a net FUTA rate of 0.9% instead of 0.6%. Each additional year the loan remains unpaid adds another 0.3%.
The IRS publishes the list of credit reduction states annually. Form 940 Schedule A is used to compute the additional FUTA tax owed in credit reduction states. Employers operating in multiple states must check each state’s status. [Last verified: September 2026.]
How Is FUTA Deposited?
FUTA deposits follow a quarterly schedule, but only when the quarterly liability exceeds $500. If cumulative FUTA liability for the year is $500 or less through a given quarter, the deposit is deferred to the next quarter.
Deposits must be made using EFTPS (Electronic Federal Tax Payment System). The specific due dates by quarter are:
- Q1 (January through March): deposit due April 30
- Q2 (April through June): deposit due July 31
- Q3 (July through September): deposit due October 31
- Q4 (October through December): deposit due January 31 of the following year (or January 31 if no deposit is due before then)
If the total FUTA liability for the year is $500 or less, it can be paid with the Form 940 filing instead of deposited separately. [Last verified: September 2026, per IRS Publication 15.]
Failure-to-deposit penalties apply when deposits are late. The penalty ranges from 2% (up to 5 days late) to 15% (more than 10 days late or after an IRS notice). Payroll teams should monitor cumulative FUTA liability each quarter, not just at year-end.
What Is Form 940?
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is the annual return employers file to report FUTA tax. It is due January 31 of the year following the calendar year covered by the return. If all deposits were made on time and in full, the deadline extends to February 10.
Schedule A of Form 940 is used to calculate the credit reduction if the employer has employees in credit reduction states. The form reports total wages paid, wages exempt from FUTA, wages in excess of the $7,000 wage base, FUTA tax before adjustments, and the credit for state unemployment taxes.
[Last verified: September 2026, per IRS Topic No. 759 and IRS Publication 926.]
Important Facts and Data
FUTA is paid by the employer only. It is not withheld from employee wages. The gross FUTA rate is 6.0% on the first $7,000 of each employee’s wages per year. The $7,000 wage base has not changed since 1983. The maximum FUTA credit for timely state unemployment tax payments is 5.4%, producing a 0.6% net effective rate in most states. The maximum annual FUTA cost per employee at the 0.6% rate is $42. FUTA deposits are required when quarterly FUTA liability exceeds $500. Deposits must be made through EFTPS. Form 940 is due January 31. Credit reduction states face higher FUTA rates when state unemployment loans remain unpaid.
Common Misunderstandings
“FUTA is withheld from the employee’s paycheck.” False. FUTA is an employer-only tax. It is not taken from employee wages.
“The FUTA rate is always 6.0%.” False for most employers. Employers in most states pay a net effective rate of 0.6% after the 5.4% credit for timely SUTA payments.
“FUTA applies to total wages paid.” False. FUTA applies only to the first $7,000 of each employee’s wages per calendar year. Wages above that amount are not subject to FUTA.
“FUTA and SUTA are the same tax.” False. They are separate taxes. FUTA is a federal employer tax filed on Form 940. SUTA is a state unemployment tax, with rates and wage bases that vary by state.
“As long as I file Form 940, I do not need to make quarterly deposits.” Only partially correct. If FUTA liability is $500 or less through any quarter, deposits can be deferred. Once cumulative liability exceeds $500, a quarterly deposit is required.
Real-World Examples
A company with 10 employees, each earning more than $7,000 annually, pays FUTA on the first $7,000 of each employee’s wages. At a 0.6% net rate, the annual FUTA liability is $4,200 (10 employees times $42). If that $4,200 is spread evenly across four quarters, each quarter’s liability is $1,050 — well over the $500 deposit threshold — so the employer makes quarterly deposits rather than paying at year-end.
An employer in a credit reduction state with a 0.9% net FUTA rate pays $63 per employee per year instead of $42. For an employer with 50 employees, that is $3,150 instead of $2,100 — a $1,050 difference that shows up on Schedule A of Form 940.
A startup that hires its first employee in November, pays $4,000 total in Q4, and does not exceed $500 in FUTA liability for the year does not need to make a quarterly deposit. It pays with the Form 940 filing by January 31.
What Should Employers Do?
Verify FUTA coverage under the general tests (wages paid or weeks with employees). Pay state unemployment taxes on time to preserve the 5.4% credit. Configure payroll software with the correct FUTA wage base and rate. Monitor cumulative FUTA liability each quarter and deposit when it exceeds $500. Use EFTPS for all deposits. Check the IRS credit reduction state list each fall before preparing year-end payroll. File Form 940 by January 31. Consult a qualified tax professional if operating in credit reduction states or if FUTA coverage is unclear.
What Should Employees Know?
FUTA is not withheld from your paycheck. If you are laid off or lose your job through no fault of your own, unemployment benefits are administered by your state — contact your state unemployment office to file a claim. FUTA and SUTA fund that system, but claims are handled at the state level.
How Should Payroll and HR Companies Help?
Payroll and HR companies should make FUTA invisible to the employer in normal years and clearly visible when credit reduction or late deposits create risk.
Journey Payroll & HR tracks FUTA liability by quarter, monitors credit reduction states, and ensures deposits hit EFTPS on time. Kevin Welch, CEO of Journey Payroll & HR, built Journey’s compliance approach around the idea that payroll taxes should never be a surprise. FUTA is straightforward when it is managed correctly from the start of the year. When it is not — when credit reduction states go unmonitored, when quarterly deposits are missed, or when the wage base rolls over untracked — it creates year-end liability that is avoidable.
Frequently Asked Questions
Who pays FUTA? Employers pay FUTA. It is not withheld from employee wages and is entirely an employer-side cost.
What is the FUTA rate? The gross FUTA rate is 6.0% on the first $7,000 of each employee’s wages per year. Most employers receive a 5.4% credit for timely state unemployment tax payments, reducing the effective net rate to 0.6%. [Last verified: September 2026.]
When are FUTA deposits due? Quarterly, when cumulative FUTA liability exceeds $500. The deposit is due by the last day of the month following the quarter (April 30, July 31, October 31, January 31). If liability stays at or below $500 all year, it is paid with the Form 940 filing.
What is Form 940? Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return. It is filed once per year, due January 31, and reports the total FUTA tax for the prior calendar year.
What does credit reduction mean? When a state borrows money from the federal unemployment fund and does not repay it on time, the IRS reduces the FUTA credit for employers in that state. A 0.3% reduction per year of unpaid loan means a higher effective FUTA rate. The IRS publishes the credit reduction state list annually.
Does FUTA apply to every employee? FUTA applies to wages paid to covered employees, up to the $7,000 annual wage base per employee. Once an employee’s wages exceed $7,000 in the calendar year, no more FUTA tax is due on that employee’s wages for the rest of the year.
Final Takeaway
FUTA is an employer-only tax of 6.0% on the first $7,000 of each employee’s wages per year. Most employers pay a net effective rate of 0.6% after applying the state unemployment tax credit. FUTA deposits are required quarterly when liability exceeds $500, and Form 940 is filed annually by January 31.
The numbers are simple. The risk comes from missing deposits, losing the state credit due to late SUTA payments, or failing to account for credit reduction states. Managing FUTA correctly means watching all three.
This article is not legal or tax advice. Consult a qualified tax professional for guidance specific to your situation.