Federal unemployment tax, known as FUTA, funds the federal share of the unemployment insurance system. Unlike Social Security and Medicare taxes, it is paid only by employers; nothing is withheld from employees. It is reported once a year on Form 940, but it may need to be deposited during the year.

How FUTA is calculated

The IRS explains in Publication 15 that the FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the calendar year. Employers who pay state unemployment tax on time can generally take a credit of up to 5.4%, which leaves an effective federal rate of 0.6%. In practice that means the federal tax per employee is usually modest, but only if state contributions are paid in full and on time.

Who must pay

Most employers are liable for FUTA if they paid wages of $1,500 or more in any calendar quarter, or had at least one employee for some part of a day in 20 or more different weeks, during the current or prior year. Different tests apply to household and agricultural employers. Organizations exempt under section 501(c)(3) are not subject to FUTA.

Deposit rules

FUTA is reported annually but deposited quarterly once your accumulated liability exceeds $500. If it is $500 or less at the end of a quarter, it carries forward to the next quarter. The final quarter's balance can be paid with the return if it is $500 or less.

Credit reduction states

When a state has borrowed from the federal government to pay unemployment benefits and not repaid the loan on schedule, employers in that state lose part of the 5.4% credit. The list of credit reduction states is published each year and the extra tax is calculated on Schedule A of Form 940. Employers in affected states should budget for the additional cost.

Due date

Form 940 is generally due January 31 for the prior year. If all FUTA tax was deposited on time, the due date extends to February 10. Check the current Form 940 instructions each year.

Keeping FUTA right in the books

  • Record FUTA expense each payroll and post it to a FUTA payable account
  • Stop accruing for each employee once their wages pass the federal wage base
  • Reconcile the payable account to deposits each quarter
  • Compare state unemployment payments with state filings so the credit is supported

Most payroll software calculates FUTA automatically, but the wage base cap and state credit depend on correct setup. Our payroll services review both, and our guide to understanding employment taxes explains how FUTA fits with other payroll taxes.

Reconciling Form 940

Before filing, compare the total wages on Form 940 with the total of Forms 941 for the year and with the W-2 totals. Differences usually come from wages exempt from FUTA, such as certain fringe benefits, or from payments to family members exempt from FUTA in some entity types. Document each difference so the forms can be explained.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • SUTA (State Unemployment Tax): SUTA is the state unemployment insurance tax employers pay on wages, at a rate set by each state.
  • Exempt and Non-Exempt Employees: Non-exempt employees must receive overtime under federal law; exempt employees meet specific tests that remove that requirement.
  • Fringe Benefits: Fringe benefits are forms of pay other than wages, such as health coverage, vehicles or discounts, which are taxable unless an exclusion applies.