What is FUTA?
FUTA, the Federal Unemployment Tax Act, is a federal payroll tax that employers pay to help fund the federal government's unemployment compensation program. Unlike Social Security and Medicare taxes (FICA), the FUTA tax is paid entirely by the employer; employees do not have any portion withheld from their wages.
For small business owners, understanding FUTA is essential to staying compliant with employment tax laws and supporting your employees’ access to unemployment benefits, should they ever lose their job through no fault of their own. FUTA is one of the lesser-known payroll taxes, but ignoring it can lead to steep penalties.
Why FUTA matters to employers
FUTA funds help support state unemployment insurance systems. While states pay most unemployment benefits, the federal government uses FUTA tax revenue to:
- Provide loans to states with depleted unemployment funds
- Pay for the administration of state unemployment offices
- Fund job training and reemployment services
As an employer, your FUTA contributions are a part of your broader responsibility to support the unemployment insurance safety net. Even if you’ve never had an employee claim unemployment, you’re still required to pay FUTA if your business meets certain criteria.
Who has to pay FUTA?
You are subject to FUTA tax if:
- You paid $1,500 or more in wages to employees in any calendar quarter this year or last year
- OR you had at least one employee (full-time, part-time, or temporary) working any part of a day in 20 or more different weeks during the current or previous calendar year
This applies to most businesses, including corporations, partnerships, and sole proprietorships.
What is the FUTA tax rate?
As of 2025, the FUTA tax rate is:
- 6.0% on the first $7,000 of each employee’s annual wages
- After $7,000, no additional FUTA tax is owed for that employee in the same year
However, employers can typically receive a credit of up to 5.4% if they pay state unemployment taxes on time and in full. This reduces the effective FUTA tax rate to 0.6%.
Let’s break it down:
- Without the credit: You pay $420 per employee per year ($7,000 × 6.0%)
- With the credit: You pay $42 per employee per year ($7,000 × 0.6%)
Note: If your state has borrowed from the federal government to fund unemployment and hasn't repaid it, your FUTA credit could be reduced. This is known as a credit reduction state.
When and how to pay FUTA taxes
Employers must:
- Calculate FUTA tax each quarter based on employee wages
- Deposit the tax quarterly using the Electronic Federal Tax Payment System (EFTPS), if the total owed is more than $500 in a quarter
- Carry over any amount less than $500 to the next quarter until the $500 threshold is met
- File Form 940 annually – The Employer's Annual Federal Unemployment (FUTA) Tax Return
Form 940 is typically due by January 31 each year, covering the previous calendar year.
Common mistakes to avoid
- Missing the filing deadline for Form 940
- Overlooking eligibility for the state tax credit
- Failing to calculate FUTA quarterly can result in underpayment
- Confusing FUTA with FICA or SUTA (state unemployment tax)
Staying organized throughout the year is the best way to avoid issues at tax time.
How FUTA interacts with SUTA (state unemployment tax)
While FUTA is a federal tax, most states also require employers to pay SUTA, or state unemployment taxes. You must:
- Register with your state’s unemployment agency
- Pay SUTA taxes based on your state’s wage base and rate
- Ensure SUTA payments are made on time to claim the full FUTA credit
The combination of SUTA and FUTA ensures that your employees can access unemployment benefits if they’re laid off or let go without cause.
How Homebase payroll helps you manage FUTA and more
FUTA may only come up once a year, but getting it wrong can mean penalties or lost tax credits. With Homebase payroll, you can automate the entire process—from quarterly calculations to annual reporting.
Homebase helps you:
- Automatically calculate FUTA and SUTA tax amounts with each payroll run
- Track employee wage thresholds and stop payments at $7,000
- File and submit Form 940 on time
- Ensure you're capturing the full state credit to reduce your FUTA rate
- Stay compliant with all local, state, and federal tax laws
Explore Homebase payroll to streamline your payroll process, stay ahead of deadlines, and eliminate the stress of managing employment taxes.