Who Pays FUTA Tax? What Every New Employer Needs to Know

FUTA, the Federal Unemployment Tax Act, is a federal payroll tax paid by employers to help fund unemployment benefits. It applies as soon as you bring on your first W-2 employee.

Here’s what you owe, how it’s calculated, and what it costs a business your size.

Does FUTA apply to your small business?

For most small business owners with at least one W-2 employee, the answer is yes. This is known as the general test for FUTA liability. It applies if either of these is true:

• You paid $1,500 or more in employee wages in any calendar quarter, OR

• You had at least one employee who worked 20 or more weeks during the year (doesn’t need to be consecutive).

Both are easy to meet. A part-time employee on a regular schedule can hit the 20-week mark in under five months. A few hours a week at minimum wage can push a quarter over $1,500.

For exemption details and a breakdown of what FUTA is and how to calculate it, see the FUTA terminology guide.

SurePayroll® By Paychex calculates, files, and deposits payroll taxes on your schedule, including FUTA and Form 940.

FUTA is your tax obligation

You pay it. Your employees don’t.

FUTA is an employer-only tax. You carry the full cost. You don’t withhold anything from your employees’ paychecks.

FUTA isn’t the only payroll tax that falls on you. See which payroll taxes come out of your budget.

FUTA doesn’t apply to independent contractors.

If you pay employees and independent contractors, only the W-2 wages are subject to FUTA. Payments to independent contractors and freelancers, or other workers paid on a 1099, are not.

This distinction only holds if your classifications are correct. If a worker functions as an employee but is classified as a contractor, you may owe FUTA on those payments.

If you’re unsure how to correctly classify a worker on your team, start with the IRS Common Law Employee Test. The IRS worker classification guidelines also cover it.

Most small businesses don’t qualify for exemptions.

Under federal law, nonprofit organizations that qualify as 501(c)(3) entities, government entities, and certain household employers who meet the household employees test may qualify for a FUTA exemption.

For most private small businesses with W-2 employees, FUTA exemptions don’t apply. Read the FUTA terminology guide for eligibility details.

What FUTA costs your business, and why most employers pay less than ​​​​1%

Nearly every employer owes the 6% FUTA tax rate up front. Most get back the bulk of it through a credit for paying state unemployment tax on time, which brings the net rate down to about 0.6% for small businesses that qualify. Here’s how that credit works, and when it doesn’t apply.

If you pay your state unemployment tax under the State Unemployment Tax Act (SUTA) each quarter on time, you qualify for a federal credit of up to 5.4% (known as the SUTA credit) that brings your effective FUTA rate down to 0.6%. That credit isn’t guaranteed. Miss a payment and it’s at risk.

FUTA and SUTA aren’t two separate obligations running independently. They are connected. Paying SUTA correctly and on time unlocks the FUTA tax credit.

FUTA applies only to the first $7,000 in taxable wages per employee. That’s the FUTA wage base.

At the 0.6% FUTA tax rate, the total FUTA tax for one employee who reaches the wage base is $42 per year. For a three-person team, your total FUTA tax liability is $126 for the year, not per quarter, not per paycheck. Per year.

At the gross 6% rate (before the credit), the maximum per employee is $420. Your SUTA record determines which number you pay.

Note: If your state is on the federal credit reduction list, your FUTA rate will be higher than 0.6%. Credit reduction states are states that borrowed from the federal government to cover unemployment benefits and haven’t repaid the loan on schedule, so employers there see a FUTA credit reduction until the loan is repaid. Check the U.S. Department of Labor's credit reduction states list before treating $42 as your final number.

Learn how state unemployment insurance (SUI) works and how it connects to your FUTA rate.

“SurePayroll has taken away the headache of calculating payroll taxes and filing quarterly taxes. It’s been such a relief knowing everything is handled accurately and on time, which saves me a ton of stress and frees me up to focus on running my business.”

— Wellness and Fitness Business Owner, G2 review

Deadlines, deposits, and how FUTA fits your small employer tax picture

Form 940, your annual FUTA tax return, is due January 31 each year, or February 10 if you made every required FUTA deposit on time.

Of the three employer employment taxes (FUTA, FICA, and SUTA) FUTA is typically the lowest in total annual cost for a business your size. SUTA tax varies by state. FICA (Federal Insurance Contributions Act) tax, which covers Social Security and Medicare, is split between you and your employees. FUTA is fixed at the federal level.

The compliance risk isn’t the amount. It’s the deadline. If your total FUTA tax liability in a quarter exceeds $500, your deposit is due by the last day of the following month. If it’s $500 or less, you can carry it to the next quarter. Miss a due date and IRS payroll penalties start at 2% of the total tax due, growing the longer you wait.  

Deposits must be made through the IRS Electronic Federal Tax Payment System (EFTPS). If you haven’t enrolled, do it before your first deposit is due.

You file IRS Form 940, your FUTA tax return, annually for each calendar year. Get Form 940 deadlines and filing details.  

Important note: Form 941, the employer’s quarterly federal tax return, is due four times a year: April 30, July 31, October 31, and January 31. Missing a deadline triggers IRS penalties that start at 2% and escalate the longer you wait. How to complete Form 941 in 5 steps.

For the full employer tax picture, including what payroll taxes you’re responsible for and how payroll tax differs from income tax, see the payroll tax overview.

More information depending on what you need next:

You know what FUTA is, how it applies to your business, and what you owe. Here’s where to go for more details:

• FUTA terminology guide: FUTA definition, how to calculate the rate, and how it compares to FICA and SUTA.

• FUTA and FICA comparison: Often confused, FUTA and FICA fund different programs and operate differently.

• Payroll taxes paid by employers: A full picture of employer payroll tax obligations.

You know what you Oowe. Now make it easy.

FUTA, the Federal Unemployment Tax Act, applies to your business as an employer with W-2 employees. At the 0.6% effective rate, available to those who stay current on state unemployment tax, the annual cost is predictable and manageable. The compliance risk isn’t the math. It’s the deadlines.

You retain visibility while SurePayroll calculates payroll taxes, makes required deposits on your schedule, and files Form 940, while you stay in control.