What Is FUTA Tax? A Simple Guide for Employers

If you’ve ever run payroll or reviewed your business’s tax obligations, you’ve probably seen the term FUTA. It might sound technical, but it’s actually a key part of how unemployment benefits are funded in the United States.

This article will break down what the FUTA tax is, how it works, who pays it, and why it matters for your business.

What does FUTA stand for?

FUTA stands for the Federal Unemployment Tax Act, a federal law that helps fund state workforce agencies and unemployment insurance programs. When an eligible employee loses their job through no fault of their own, FUTA is one of the sources that makes unemployment benefits possible.

Unlike Social Security or Medicare, FUTA is paid only by employers. Employees do not see any FUTA deductions on their paychecks.

Who pays FUTA tax?

FUTA applies to most employers who pay wages. Specifically, if your business paid $1,500 or more in wages during any calendar quarter of the current or previous year, or employed at least one person for 20 different weeks, then you’re subject to FUTA.

This tax obligation starts as soon as you meet either of those criteria. From that point on, you must calculate and pay FUTA tax on a quarterly basis, and report it annually through IRS Form 940.

How much is the FUTA tax?

The standard FUTA tax rate is 6%, and it applies only to the first $7,000 in wages paid to each employee per calendar year. That means the maximum FUTA liability per employee is $420 annually.

However, most employers receive a credit of up to 5.4% for paying their state unemployment taxes on time. With that credit applied, the effective FUTA rate drops to 0.6%, or $42 per employee per year.

But there’s a catch. Some states-such as California and New York-have borrowed money from the federal government to cover unemployment benefits. Until those debts are repaid, employers in those states may face a reduced FUTA credit, resulting in a higher effective rate.

For example, in 2024 and 2025, employers in California and New York faced an effective FUTA rate of 1.5%, raising their per-employee cost to $105 annually.

How is FUTA paid and reported?

Employers are responsible for paying FUTA directly to the IRS each quarter using the Electronic Federal Tax Payment System (EFTPS). Deadlines fall on the last day of the month following the end of each quarter (April 30, July 31, October 31, and January 31).

Even though you pay quarterly, you report FUTA tax annually using IRS Form 940, which is due each January. If you paid all your quarterly FUTA taxes on time, you get an automatic 10-day extension to file the form.

Are any employers exempt?

Some employers are exempt from FUTA depending on the type of organization and employees they have. For example:

• Nonprofits that are registered as 501(c)(3) organizations are exempt from FUTA.
• Household employers must pay FUTA only if they paid at least $1,000 in wages in a calendar quarter.
• Farm employers must pay FUTA if they paid $20,000 or more in wages in a quarter or employed 10 or more workers for at least part of a day in 20 different weeks.

Is FUTA ever taken out of employee paychecks?

No. FUTA is entirely an employer-paid tax. It’s not deducted from employee wages and should never appear on a paycheck. The entire tax burden falls on the employer.

This makes FUTA different from other payroll taxes like FICA, which includes Social Security and Medicare and is shared between employer and employee.

Why does FUTA matter?

FUTA exists to ensure that unemployment benefits are available when needed. As an employer, staying compliant with FUTA means doing your part to support a safety net that helps workers get back on their feet.

From a business perspective, missing FUTA deadlines or miscalculating amounts can result in penalties and interest. It’s one of those taxes that’s easy to overlook, but important to stay on top of.

Final thoughts

If you run a business with employees, FUTA is part of your tax picture. While it may not be the largest payroll tax you face, it’s still a recurring cost with specific deadlines and rules.

At Paypro, we help employers simplify their payroll operations-including tax compliance-so you can focus on running your business. From calculating liabilities to filing Form 940, we’ve got your back.

Need help managing FUTA and other payroll taxes?

Let Paypro handle the heavy lifting. Contact us to learn how our workforce solutions can streamline your tax processes.

About the Author

Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.