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

Your client calls in March. Their bookkeeper just flagged a $2,100 FUTA deposit they missed in October. Now they owe the tax plus a late-deposit penalty — and they’re asking you why nobody caught it. If payroll compliance isn’t part of your firm’s review checklist, FUTA is exactly the kind of quiet liability that surfaces at the worst time.

Here’s what every employer and their CPA needs to know to stay clean.

Who Actually Owes FUTA

FUTA is an employer-only tax. Nothing is withheld from employee paychecks — the entire cost sits on the business. Two triggers determine whether a company is subject to the federal general test:

• It paid $1,500 or more in wages in any calendar quarter during the current or prior year, or
• It had at least one employee for any part of a day in 20 or more different weeks in the current or prior year.

Most small businesses hit one of these tests by Q1. Household employers and farmworkers fall under separate IRS coverage tests, so those situations need a closer look — see IRS for the IRS rules that apply to those categories.

New S-corp owners sometimes assume they’re exempt because they’re owner-operators. They’re not, as long as they have W-2 employees who meet the thresholds above.

The Rate, the Wage Base, and the Credit That Changes Everything

The statutory FUTA rate is 6.0%, applied only to the first $7,000 of each employee’s annual wages — that ceiling is called the FUTA wage base. Once an employee’s cumulative wages pass $7,000 for the year, FUTA stops accruing on their earnings.

At 6.0%, the worst-case FUTA cost per employee is $420 per year.

Most employers never pay 6.0%, because of the SUTA credit:

• If an employer pays their state unemployment (SUTA) tax in full and on time, they can claim a 5.4% federal credit.
• That credit drops the effective FUTA rate to 0.6% — a maximum of $42 per employee per year.

The catch: employers in credit-reduction states (states that borrowed from the federal unemployment fund and haven’t repaid it) lose part of the 5.4% credit. The IRS publishes the credit-reduction state list each November when Schedule A of Form 940 is finalized. If your clients operate in multiple states, check that list before you close their payroll year.

How to Calculate FUTA: A Worked Example

Suppose a company has 8 employees, each earning at least $7,000 during the year, and the employer qualifies for the full 5.4% SUTA credit.

1. Taxable wage base per employee: $7,000
2. Total FUTA wage base: 8 × $7,000 = $56,000
3. Effective FUTA rate: 0.6%
4. Annual FUTA liability: $56,000 × 0.006 = $336

If even two of those employees earn less than $7,000 — say, one seasonal worker with $4,200 in wages and one part-timer with $3,500 — recalculate using their actual wages instead of the $7,000 cap. The cap is a ceiling, not a floor.

Deposit Schedule and Filing Deadlines

FUTA deposits don’t follow the same calendar as income tax withholding. The rules:

• Quarterly deposits are required when cumulative FUTA liability reaches $500 or more. Deposit deadlines fall on January 31, April 30, July 31, and October 31.
• If liability stays below $500 at the end of a quarter, carry it forward to the next quarter.
• The annual return is Form 940, due January 31 of the following year.
• Employers who paid all FUTA tax on time during the year get an automatic extension to February 10 to file Form 940.

The most common mistake I see: a firm accumulates liability all year, crosses $500 in Q4, and then misses the October 31 deposit because nobody was tracking the running total. Set a quarterly calendar reminder tied to payroll close.

FUTA vs. SUTA: The Relationship That Affects Your Rate

FUTA and SUTA are separate taxes but financially linked. FUTA funds the federal unemployment insurance program and backstops state systems; SUTA funds state-administered benefits directly. Paying SUTA in full and on time is what earns the 5.4% federal credit.

If a client is delinquent on SUTA in even one state, their effective FUTA rate on wages paid in that state jumps back toward 6.0%. That’s not a rounding error — on a 20-person payroll it can mean thousands of dollars in unexpected federal tax. For a reference on state-specific SUTA wage bases and rates, see What Is Suta Tax.

How Sagenext Helps

When payroll and tax deadlines stack up — FUTA deposits in late October, Form 940 in January, 1099s and W-2s right behind them — the friction usually isn’t knowledge, it’s workflow. Firms running QuickBooks Desktop, Drake, or Lacerte on local machines burn time on software updates, backup failures, and remote-access workarounds exactly when they can least afford it.

Sagenext hosts those applications on a fully managed cloud platform. Payroll runs in QuickBooks, FUTA calculations update in real time, and the firm’s CPA can pull the numbers from any device without a VPN. Updates, backups, and security are handled — your staff isn’t doing IT triage the night before a deposit deadline.

If your firm hasn’t tested a cloud environment, offers a free trial with no credit card required.

Key Takeaways

• FUTA is employer-paid at 6.0% on the first $7,000 of each employee’s wages; employees owe nothing.
• Timely, full SUTA payment earns a 5.4% federal credit, cutting the effective rate to 0.6% — that’s $42 maximum per employee per year.
• Employers subject to FUTA must deposit quarterly once cumulative liability exceeds $500; deadlines are January 31, April 30, July 31, and October 31.
• Form 940 is due January 31; employers who paid all tax on time can file as late as February 10.
• Credit-reduction states reduce the 5.4% SUTA credit, raising the effective FUTA cost — check Schedule A every November.
• Missing a quarterly SUTA payment in any state can eliminate the federal credit on wages paid in that state, dramatically increasing FUTA liability.

Frequently Asked Questions

Who pays FUTA tax — the employer or the employee?

The employer pays FUTA entirely. Nothing is withheld from employee wages, and employees have no FUTA obligation. The tax is calculated on the employer’s side based on wages paid, not deducted from paychecks. This distinguishes FUTA from Social Security and Medicare, which are split between employer and employee.

What is the FUTA wage base and current tax rate?

FUTA applies only to the first $7,000 of each employee’s annual wages. The statutory rate is 6.0%, but most employers qualify for a 5.4% SUTA credit, leaving an effective rate of 0.6%. At that effective rate, the maximum FUTA cost per employee is $42 per year. Employers in credit-reduction states pay a higher effective rate.

When are FUTA deposits due?

FUTA deposits are due quarterly — January 31, April 30, July 31, and October 31 — but only when cumulative liability reaches $500 or more. If the running total stays under $500 at the end of any quarter, you carry it forward. Form 940, the annual FUTA return, is due January 31, with a February 10 extension available for employers who deposited all tax on time.

What happens if my client operates in a credit-reduction state?

Credit-reduction states have borrowed from the federal unemployment fund and not fully repaid it. Employers in those states lose a portion of the 5.4% SUTA credit when calculating FUTA. The IRS publishes the affected states annually on Schedule A of Form 940. For multistate employers, this requires tracking FUTA liability by state, not just in aggregate.

Does FUTA apply to every business?

Not automatically. Under the general test, FUTA applies if the employer paid $1,500 or more in wages in any calendar quarter, or had at least one employee on any part of a day in 20 or more weeks during the current or prior year. Household employers and agricultural employers follow separate thresholds. Very small or new businesses may not trigger FUTA in their first few months, but most do by mid-year.