FUTA is the federal unemployment tax paid only by employers at 6% on the first $7,000 of each employee's wages, typically reduced to 0.6% via SUTA credit.
Why FUTA matters for employers
FUTA is paid entirely by the employer - it is never withheld from employee wages. The gross rate is 6% on the first $7,000 of each employee's annual wages. However, employers who pay state unemployment taxes (SUTA) on time receive a credit of up to 5.4%, reducing the effective net FUTA rate to 0.6% for most employers.
The maximum FUTA tax per employee per year at the net rate of 0.6% is $42. Because the wage base is only $7,000, FUTA liability concentrates in the first quarter of the year when most employees cross the threshold quickly.
FUTA deposits are required quarterly if the cumulative liability exceeds $500. If the liability for a quarter is $500 or less, it can be carried forward until it exceeds the threshold. Form 940 is filed annually by January 31 to reconcile the year's FUTA liability and credits.
Credit reduction states are states that have borrowed from the federal unemployment trust fund and not repaid the loans. Employers in credit reduction states lose a portion of the 5.4% SUTA credit and pay a higher effective FUTA rate. The IRS publishes the list of credit reduction states each November with Form 940 Schedule A.
How BEG handles FUTA for clients
BEG Managed Payroll calculates FUTA liability, makes quarterly deposits, and files Form 940 annually as part of fully managed payroll at $25-$45 per employee per month. Learn about BEG Managed Payroll.
Frequently asked questions
Do employees pay FUTA?
No. FUTA is an employer-only tax. It is never withheld from employee paychecks.
What is the FUTA wage base?
The FUTA wage base is $7,000 per employee per year and has not changed since 1983, though Congress periodically discusses increasing it.
What happens if a state has a credit reduction?
Employers in credit reduction states pay a higher effective FUTA rate because part of the normal 5.4% SUTA credit is reduced. The reduction increases by 1.5 percentage points for each year the state remains in credit reduction status.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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