What Is FUTA? Federal Unemployment Tax Explained
FUTA funds unemployment benefits and is paid entirely by employers. The 6.0% rate, the $7,000 wage base, the 5.4% state credit and why most employers actually pay 0.6%.
FUTA, the Federal Unemployment Tax Act, funds the federal share of the unemployment insurance system. Employees sometimes look for it on their pay stub and cannot find it, which is correct: FUTA is paid by the employer and nothing is withheld from wages.
The Rate and the Wage Base
The gross FUTA rate is 6.0%, applied only to the first $7,000 of wages paid to each employee during the calendar year. Once an employee crosses that threshold, no further FUTA is owed on their wages for the year. Because the base is low, the per-employee cost is capped at $420 before credits.
The State Credit
Employers who pay their state unemployment contributions on time generally receive a credit of up to 5.4% against the federal tax. That brings the effective rate down to 0.6%, or $42 per employee per year for anyone earning at least $7,000. This credit is why the headline 6.0% figure rarely reflects what an employer actually pays.
There is an exception worth knowing. When a state has borrowed from the federal unemployment fund and not repaid it, employers in that state face a credit reduction, which raises their effective FUTA rate. The affected states change from year to year, so it is a figure to check annually rather than assume.
Depositing and Filing
FUTA is reported annually on Form 940, due by January 31. Deposits are quarterly once the accumulated liability exceeds $500; if it stays below that, the amount can be carried to the next quarter. Keep FUTA separate in your mind from state unemployment tax, which has its own rate, wage base and filing schedule and is where most of the unemployment cost actually sits.
I cover the credit reduction mechanism, the deposit thresholds and the common filing errors in my full explainer on FUTA for Online Paystub.
What This Means for Employees
If you see a deduction on your stub that you suspect is unemployment tax, check it carefully. A small number of states require an employee contribution to their unemployment or disability programmes, but federal unemployment tax is not withheld from wages anywhere.