FUTA Tax

What Is FUTA Tax? Definition, Rate, and How It’s Calculated

‍FUTA is a federal tax that kicks in when you hire employees — usually starting the moment you get your EIN and set up payroll. Most small businesses with full-time or part-time employees will have FUTA responsibilities. FUTA is predictable from the start. Same wage base, same rate, same schedule every year.

‍Who Pays FUTA? can help you confirm how FUTA obligations apply to your business.

‍SurePayroll By Paychex automates the calculation of your FUTA liability, makes deposits, and files Form 940 on your schedule.

‍What Is FUTA and How Does It Work?

‍FUTA stands for the Federal Unemployment Tax Act. It’s a federal law that requires most employers to pay a tax that funds state unemployment benefit programs. Those programs support workers who lose their jobs through no fault of their own, for example, through layoffs.

FUTA is an employer-paid tax. Unlike federal income tax, employers pay the full amount. Nothing is deducted from employee paychecks.

To see where FUTA fits with other federal payroll taxes, read Which Payroll Taxes Are Paid by Employers.

‍FUTA Only Applies to the First $7,000 of Each Employee’s Pay

‍FUTA applies only to the first $7,000 of each employee’s annual taxable wages. Once an employee exceeds $7,000 for the year, FUTA no longer applies to that employee until the start of the next calendar year in January. This wage base cap keeps the tax predictable for small employers.

The cost of FUTA is predictable. Keeping it that way is straightforward. SurePayroll automates the calculations of your FUTA tax, makes your deposits, and files Form 940 on your schedule.

‍What Is the FUTA Tax Rate and Credit?

‍The effective FUTA rate for most employers is 0.6%. That lower rate applies when you pay your state unemployment taxes (SUTA) in full and on time.

Here’s how it works:

• The standard FUTA rate is 6%. It applies to the first $7,000 of each employee’s annual wages.

• Most employers qualify for a federal credit of up to 5.4%. To qualify, pay your state unemployment taxes (SUTA) on time and in full.

• With the credit, you pay an effective FUTA rate of 0.6%.

Here’s what FUTA costs a small business with two or three employees, each earning at least $7,000 per year.

You can claim the federal credit when you file Schedule A (Form 940) with your annual FUTA return.

Note: If your state is classified as a FUTA credit reduction state, your FUTA tax credit may be reduced. Credit reduction states are those that have not repaid federal unemployment loans. Here’s the current Department of Labor FUTA Credit Reduction list.

For more on how state unemployment taxes affect the FUTA credit, see State Unemployment Insurance (SUI).

What Is the Difference Between FUTA and SUTA?

‍FUTA, the Federal Unemployment Tax Act, is a federal employer tax you pay to the IRS at the federal level. SUTA, the State Unemployment Tax Act, is a state-level employer tax you pay to your state’s unemployment agency. Both are employer-paid.

Check the SUTA terminology page for the full breakdown on SUTA taxes and state unemployment taxes.

‍Who Is Exempt from FUTA?

‍Most small businesses with W-2 employees don’t qualify for a FUTA exemption. The main exemptions cover 501(c)(3) nonprofit organizations; federal government, state, and local government entities; and household workers paid less than $1,000 in any calendar quarter.

Additional exemptions exist for certain agricultural employees and farmworkers, household employees, and a few other narrow categories. Payments to exempt workers, along with all payments to independent contractors, are not subject to FUTA.

If you need to confirm whether your business or a specific worker qualifies, consult a tax professional or review Who Pays FUTA?

‍Three Taxes, Three Purposes: FUTA, FICA, and SUTA

‍FUTA is one of three employer payroll taxes that cover your federal and state obligations.

For most small employers, FUTA is the smallest of the three, and the SUTA credit keeps it that way. Use Form 940 to report and deposit FUTA each year.

The payroll tax overview covers the full employer tax landscape.

‍The Bottom Line on FUTA

‍FUTA is one of the more predictable items on your payroll to-do list. The math is fixed, the schedule is set, and keeping your effective rate at 0.6% comes down to one thing: staying current on your state unemployment taxes.

Keeping it that way is straightforward. On-time deposits help prevent IRS penalties that escalate the longer they go unpaid.

SurePayroll By Paychex automates the calculation of your FUTA liability, makes deposits, and files Form 940 on your schedule.