FUTA Tax: All You Need to Know About Federal Unemployment Tax (FUTA) Systems

The FUTA tax is a federal payroll tax under the Federal Unemployment Tax Act (FUTA) that employers pay to help fund state unemployment insurance programs. It is a federal-state program, and these funds provide temporary financial assistance to workers who lose their jobs through no fault of their own. It actually provides financial assistance to workers who have lost their jobs or are actively seeking a job but are unable to find one. Most employers are required to pay both FUTA & SUTA taxes. Visit this page to check the state-wise wage base rate for SUTA tax. Only employers need to pay the FUTA tax, and it is not deducted from the employee’s payroll or wages.

Moreover, FUTA pays a portion of the cost of unemployment benefits and provides a fund from which states may borrow to cover benefits. To comply with the FUTA tax rate, businesses must maintain compliance by filing the Form 940.

In this blog post, we will understand what is FUTA tax is, how to calculate the FUTA tax rate, and more. Keep reading this article to unfold everything about FUTA compliance and tax. 

What is FUTA Tax?

The Federal Unemployment Tax (FUTA) is a federal law managed by the IRS department and established to assist states in providing financial aid to workers and employees who lose their jobs and are unable to find new ones. FUTA  establishes a federal payroll tax for US businesses and organizations that helps fund programs and benefits for unemployed citizens. It mandates employers to deposit a portion directly into the FUTA fund. The FUTA fund aligns with the SUTA fund, and both play a role in providing unemployment fund assistance to unemployed workers.

According to FUTA compliance, if a business owner pays $1,500 or more in a quarter within a financial year, they are required to pay the tax annually, in addition to the SUTA tax mandate. So both these taxes fund unemployment insurance programs that provide temporary income to eligible employees who have lost their jobs. Employers must complete Form 940 annually and make quarterly tax deposits.

FUTA was established in 1939 in response to the rise in unemployment following the Great Depression. The tax system continues to safeguard unemployed workers at large. In simpler terms, employers must pay a FUTA tax of 6% on the first $7000 earned by every employee per year. However, if the employer pays the SUTA tax in total, they may be eligible for a rebate on FUTA tax payments, which could be as low as 0.6% of the base wage amount. Keep in mind that, unlike Social Security and Medicare taxes, which are paid by the employee’s wages, FUTA & SUTA taxes are paid by the employer.

Key Points of FUTA Tax

• The FUTA tax is 6% of the first $7000 earned by each employee and is paid by the employer annually. 
• The Federal Unemployment Tax Act imposes the FUTA tax mandate, which is managed by the IRS.  
• The tax is only paid by the employers based on the employee’s wage. 
• FUTA is for the federal tax system, and SUTA is for the state tax system; both are related. 
• Employers that pay the full SUTA tax in a state are eligible for a rebate of up to 5.4%, which reduces the effective rate to as low as 0.6%. 

How to Calculate FUTA Tax?

→ Considering that a business owner has 5 employees who are earning at least $7,000 per year. 

→ So the total taxable wage would be 5 x $7000 = $35000

Case 1: Considering the employer has not received any rebate on the FUTA tax and has to pay the flat 6%. 

→ In this case, the actual FUTA tax paid by the employer would be $35000 x 6% = $2100

Case 2: Considering the employer has received a rebate of 5.4%, the effective FUTA tax rate is 0.6%. 

→ In this case, the actual FUTA tax paid by the employer would be $35000 x 0.6% = $210

FUTA Tax Calculation Formula

The general formula for calculating FUTA tax liability for a single employee is:

FUTA Tax = Taxable Wages x FUTA tax Rate (Net Credit Card) 

Taxable Wages: The first $7,000 in wages paid to a single employee during a calendar year. Once an employee earns more than $7,000, no additional FUTA tax is due for that employee for the year.

FUTA Tax Rate (net of credit): This is the standard 6.0% federal rate, minus any eligible state unemployment tax (SUTA) credit, which is typically 5.4%.

What Are The Conditions for Businesses to Pay FUTA Tax?

The IRS has set two main criteria for businesses and organizations that are required to pay FUTA tax.

1. Those businesses that have at least paid a minimum of $1500 per quarter in a financial year to his/her employees. 
2. The businesses have either one full-time, part-time, or temporary worker at any point during the day, totaling at least 20 or more weeks per year. 
3. However, if you have paid a household worker a cash wage of $1,000 or more in a year, you are required to pay FUTA. 
4. Even if you have paid an agricultural cash wage of $20000 or more to a farmworker in a year, you must pay the FUTA tax.

Concluding Words

By now, it is clear that FUTA tax is an unemployment financial aid provided to workers who lose their job or are actively seeking a job but are unable to find one. The IRS mandates that employers deposit a FUTA tax rate of 6% flat, or with a rebate of 0.6% of the first $7,000 in wages earned by each employee in a year. Employees do not pay taxes, but employers do. FUTA tax accompanies the SUTA tax mandate; the first one is for the federal government. Additionally, there is the state government of each state in the United States. Any businesses that pay a wage of $1500 or more to any kind of employee, be it part-time, full-time, or temporary, are required to pay the FUTA tax. 

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FAQs (Frequently Asked Questions)

Do employees pay FUTA tax?

No, employees do not pay FUTA tax; only employers are required to pay FUTA tax as per the criteria set by the IRS. 

What is the FUTA tax on my paycheck?

FUTA tax is not calculated on your paycheck; hence, only employers need to pay the FUTA tax. 

How to calculate FUTA tax?

Here is the formula to calculate FUTA tax:

FUTA Tax = (First $7000 of each employee’s wage annually) x (FUTA rate after state credit)

What are the 2025 FUTA tax rates and limits?

As of 2025, the current standard FUTA tax rate is 6% on the first wage of $7000 per employee per year. (You can also get a rebate of 5.4%, making the effective FUTA tax rate of 0.6%)

Are payments exempt from FUTA tax?

Yes, most of the payment types are exempt from the FUTA (Federal Unemployment Tax Act).

What are the 2024 FUTA tax rates and limits?

As of 2024, the current standard FUTA tax rate is 6% on the first wage of $7000 per employee per year. (You can also get a rebate of 5.4%, making the effective FUTA tax rate of 0.6%)