FUTA, the Federal Unemployment Tax Act, is an employer-only payroll tax that funds federal oversight of state unemployment programs. The gross rate is 6.0% on the first $7,000 of each employee's wages, but most employers pay an effective 0.6% after the state tax credit.
Key takeaways
- Employers pay FUTA; nothing is withheld from employees.
- With the full 5.4% state credit, FUTA costs $42 per employee per year.
- States that owe the federal government for unemployment loans face credit reductions, which raise the rate.
- FUTA is reported once a year on Form 940 and deposited quarterly when the liability passes $500.
How FUTA works
FUTA and state unemployment taxes work as a pair. The federal rate is 6.0% on the first $7,000 paid to each employee in a calendar year. If you pay your state unemployment tax in full and on time, you earn a credit of up to 5.4%, which brings the effective federal rate to 0.6%. That is $42 per employee per year at most (IRS, About Form 940 (FUTA)).
The credit shrinks when a state borrows from the federal unemployment trust fund and doesn't repay it within about two years. For 2025, California employers faced a 1.2% credit reduction and US Virgin Islands employers 4.5%, while Connecticut and New York repaid their loans in time to avoid one (American Payroll Association, 2025 FUTA credit reductions). For a California employer, that turned $42 per employee into $126.
You report FUTA annually on Form 940, due January 31 of the following year, or the next business day if that falls on a weekend. Deposits are due quarterly once your accumulated liability goes over $500. Most small employers with a handful of staff make a single payment with the return.
FUTA example
A Sacramento bakery employs 12 people, all of whom earned more than $7,000 in 2025.
| FUTA wages, 12 x $7,000 | $84,000 |
|---|---|
| Base FUTA at 0.6% | $504 |
| California credit reduction at 1.2% | $1,008 |
| Total 2025 FUTA | $1,512 |
The same bakery in Oregon, a state with no credit reduction, would pay $504. The credit reduction amount is due with Form 940, not in the quarterly deposits.
Why FUTA matters for employers
FUTA is small per person, but it's easy to get wrong in ways that cost more than the tax. Missing a state unemployment payment deadline can cost you part of the 5.4% credit, which multiplies the federal bill by up to ten. Seasonal businesses that hire many short-term workers feel FUTA more, because the $7,000 wage base resets for every new employee.
FUTA also matters when you compare payroll providers. Good payroll software tracks the credit reduction list each November and adjusts the Form 940 automatically. If you run payroll in a borrowing state, ask vendors how they handle it during the demo. Our payroll software guide lists the questions.
Common FUTA mistakes to avoid
Withholding FUTA from employees
FUTA is entirely an employer tax. Deducting it from pay is illegal.
Forgetting the credit reduction
Employers in borrowing states owe extra with Form 940. The DOL publishes the final list each November.
Paying state unemployment late
Late state payments can reduce the federal credit and raise FUTA.
Applying FUTA to exempt payments
Some payments, such as certain retirement plan contributions and some fringe benefits, are excluded from FUTA wages. Check Publication 15-B.
FUTA: questions people also ask
What is the FUTA tax rate for 2026?
Who pays FUTA, the employer or the employee?
Is FUTA required for small businesses?
What is a FUTA credit reduction?
How is FUTA different from SUTA?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>FUTA, the Federal Unemployment Tax Act, is an employer-only payroll tax that funds federal oversight of state unemployment programs. The gross rate is 6.0% on the first $7,000 of each employee's wages, but most employers pay an effective 0.6% after the state tax credit.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/futa/">HRTally HR Glossary, FUTA</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.