FUTA tax is a federal payroll tax that helps fund the unemployment system in the United States. FUTA stands for the Federal Unemployment Tax Act.
Unlike some other payroll taxes, FUTA tax is generally paid by employers and is not deducted from an employee’s paycheck.
Employers that are subject to FUTA tax pay the tax based on the FUTA taxable wages of their employees.
For 2026, the federal FUTA tax rate is 6.0% and applies to the first $7,000 of FUTA taxable wages paid to each employee during the calendar year.
However, employers that qualify for the maximum state unemployment tax credit of 5.4% can have an effective FUTA tax rate of 0.6%.
This means an employer that receives the full credit may pay as little as $42 in FUTA tax for an employee who earns at least $7,000 in FUTA taxable wages during the year.
FUTA works alongside state unemployment tax programs to help provide unemployment compensation to eligible workers who lose their jobs.
Because federal and state unemployment taxes work together, employers need to understand both FUTA and their state unemployment tax obligations when managing payroll.
Understanding FUTA tax is also important for accurate payroll processing, tax deposits, and annual tax reporting.
Employers that are required to pay FUTA generally report their federal unemployment tax using Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
What Does FUTA Mean?
FUTA means Federal Unemployment Tax Act.
The law created a federal unemployment tax that works with state unemployment systems to support unemployment compensation for workers who lose their jobs.
The tax is an employer payroll tax. In general, employees do not have FUTA tax withheld from their wages. Instead, an employer calculates its FUTA tax liability based on wages that are subject to FUTA.
The federal unemployment system is different from Social Security and Medicare taxes.
Those taxes are commonly associated with FICA and generally involve contributions from both employers and employees.
FUTA is different because the federal FUTA tax is generally an employer responsibility.
FUTA also works closely with state unemployment insurance programs. Most employers that are subject to FUTA also pay state unemployment taxes.
Depending on the state, these taxes may be called SUTA, SUI, state unemployment insurance tax, or another similar name.
The connection between federal and state unemployment programs is particularly important because state unemployment tax payments can affect the amount of FUTA tax an employer owes.
How Does FUTA Tax Work?
FUTA tax is based on the FUTA taxable wages an employer pays during the calendar year.
However, the tax does not continue to apply to all of an employee’s wages throughout the year.
For 2026, FUTA applies to the first $7,000 of wages paid to each employee, subject to applicable exclusions.
This amount is known as the FUTA wage base or federal unemployment tax wage base.
Consider an employee who receives $40,000 in FUTA taxable wages during the year.
The employer does not calculate FUTA tax on the full $40,000. Only the first $7,000 is within the federal FUTA wage base.
Once that employee reaches $7,000 in FUTA taxable wages for the calendar year, additional wages paid to that employee are generally not subject to FUTA tax for that year.
The calculation starts again in the next calendar year because the FUTA wage base applies separately to each employee for each year.
Employers also need to consider the credit available for state unemployment tax payments.
The standard FUTA rate is 6.0%, but eligible employers can generally receive a credit of up to 5.4% for qualifying state unemployment contributions.
With the full credit, the effective FUTA tax rate becomes 0.6%.
The availability of the full credit depends on several factors, including whether state unemployment taxes were paid correctly and on time and whether the employer operates in a FUTA credit reduction state.
Who Pays FUTA Tax?
FUTA tax is paid by employers. It is generally not withheld from employees’ wages.
This distinction is important because employees may see other taxes deducted from their gross pay, including federal income tax, Social Security tax, and Medicare tax.
FUTA does not normally appear as an employee payroll deduction because the employer is responsible for paying it.
Not every person or business that pays someone for work automatically has a FUTA tax obligation.
The IRS uses specific tests to determine whether an employer is subject to FUTA.
For general employees who are not farmworkers or household workers, an employer is generally subject to FUTA tax for 2026 if it paid wages of $1,500 or more in any calendar quarter during 2025 or 2026.
An employer may also become subject to FUTA if it had one or more employees for at least part of a day during 20 or more different weeks in 2025 or 20 or more different weeks in 2026.
These are separate tests. Meeting either applicable test can result in FUTA tax obligations.
Different rules apply to household employees and farmworkers, so employers in these categories should review the specific FUTA requirements that apply to them.
FUTA Tax Rules for Household Employers
Household employment has a separate FUTA test.
For 2026, an employer is generally subject to FUTA tax if total cash wages of $1,000 or more were paid to household employees during any calendar quarter in 2025 or 2026.
Household employees may include workers who perform household work in a private home when an employer-employee relationship exists.
Because household employment taxes have special rules, household employers should determine whether a worker is an employee and whether the applicable wage threshold has been reached.
FUTA Tax Rules for Agricultural Employers
Agricultural employers also have separate FUTA requirements.
For 2026, an employer can be subject to FUTA tax on farmworker wages if it paid cash wages of $20,000 or more to farmworkers during any calendar quarter in 2025 or 2026.
An agricultural employer can also become subject to FUTA if it employed 10 or more farmworkers for at least part of a day during 20 or more different weeks in 2025 or 20 or more different weeks in 2026.
Special rules can apply to agricultural workers, including workers admitted to the United States under the H-2A visa program.
Employers should consider these rules separately when calculating federal unemployment tax.
Who Is Exempt From FUTA Tax?
FUTA does not apply to every employer, worker, service, or type of payment. Federal tax rules provide several exemptions and special situations in which wages or services may not be subject to FUTA.
For example, organizations that qualify under section 501(c)(3) of the Internal Revenue Code are generally exempt from FUTA tax.
This can include qualifying charitable, religious, educational, and scientific organizations.
Services performed for state and local government employers are also generally not subject to FUTA tax.
Certain services performed for federally recognized Indian tribal governments can also qualify for an exemption when the applicable requirements are met.
Family employment can receive special treatment as well. For example, payments for services provided by a child under age 21 who works for a parent can be exempt from FUTA under certain business structures.
Wages for an individual working for their spouse can also be exempt in certain circumstances.
Payments made to a parent employed by their child can receive FUTA exemption under applicable rules.
The business structure matters when applying family employment rules.
For example, wages may receive different treatment when the worker is employed by a corporation rather than directly by a family member.
Employers should not assume that every family employee is automatically exempt from FUTA.
Certain payments can also be excluded from FUTA taxable wages.
Depending on the circumstances, these can include qualifying employer contributions to retirement plans, certain health plan contributions, certain dependent care payments, workers’ compensation payments related to work injuries or sickness, and some other payments excluded under federal tax rules.
Wages paid to H-2A agricultural workers are generally not subject to FUTA tax.
Certain services performed by qualifying nonresident aliens temporarily present in the United States under F-1, J-1, M-1, or Q-1 immigration status may also be exempt when IRS requirements are satisfied.
Worker classification also matters. FUTA applies to employees when the applicable requirements are met.
Payments to a true independent contractor are generally not employee wages subject to FUTA.
However, simply calling a worker an independent contractor does not determine the worker’s tax status.
The actual working relationship and federal worker classification rules need to be considered.
Because FUTA exemptions can depend on the employer, worker, type of service, payment, and business structure, employers should review the applicable rules before excluding wages from their FUTA tax calculation.
What Is the FUTA Tax Rate for 2026?
The FUTA tax rate for 2026 is 6.0%. This rate applies to the first $7,000 of FUTA taxable wages paid to each employee during the calendar year.
However, many employers do not ultimately pay FUTA at the full 6.0% rate.
An employer may generally receive a credit of up to 5.4% for qualifying state unemployment tax contributions.
When an employer qualifies for the maximum 5.4% credit, the effective FUTA tax rate is reduced from 6.0% to 0.6%.
The calculation is simple. A 6.0% federal FUTA rate minus a 5.4% maximum credit results in a 0.6% effective FUTA rate.
At an effective rate of 0.6%, an employer with an employee who reaches the full $7,000 FUTA wage base would generally have $42 of FUTA tax for that employee, before considering any special adjustments.
However, employers should not automatically assume that their FUTA rate will always be 0.6%.
The amount of available credit can be affected by state unemployment tax payments and whether the employer has wages in a credit reduction state.
What Is the FUTA Wage Base?
The FUTA wage base is the maximum amount of an employee’s annual wages that is subject to federal unemployment tax.
For 2026, the FUTA wage base is $7,000 per employee.
This does not mean that employees can only earn $7,000.
It simply means that, after applicable exemptions and exclusions, FUTA tax generally stops applying once an employee reaches $7,000 in FUTA taxable wages during the calendar year.
For example, assume an employee earns $60,000 during the year and all of the first $7,000 is subject to FUTA.
The employer calculates FUTA using $7,000, not $60,000.
If another employee earns only $5,000 in FUTA taxable wages during the same year, the employer generally calculates FUTA using $5,000 because that employee did not reach the $7,000 wage base.
The federal wage base should not be confused with a state unemployment wage base.
State unemployment programs establish their own rules and wage bases, which may be different from the federal $7,000 FUTA wage base.
How to Calculate FUTA Tax
Calculating FUTA tax starts with determining the employee’s FUTA taxable wages.
An employer first identifies how much of the employee’s wages are subject to FUTA.
The employer then applies the $7,000 annual FUTA wage base. If the employee has more than $7,000 in FUTA taxable wages, only the first $7,000 is generally used.
The employer then determines the FUTA rate that applies after considering any available state unemployment tax credit.
For an employer that qualifies for the maximum 5.4% credit, the effective FUTA tax rate is normally 0.6%.
The basic FUTA tax formula is:
FUTA taxable wages × applicable FUTA tax rate = FUTA tax liability.
FUTA Tax Calculation Example
Assume an employee earns $30,000 in FUTA taxable wages during 2026.
Because the federal FUTA wage base is $7,000, only $7,000 of that employee’s wages is used for the FUTA calculation.
If the employer qualifies for the full state unemployment tax credit, the effective FUTA tax rate is 0.6%.
The calculation is $7,000 multiplied by 0.6%, which equals $42.
Therefore, the employer’s FUTA tax for that employee would generally be $42 for the year.
Now assume another employee earns only $4,000 during the year and all $4,000 is subject to FUTA.
Because the employee has not reached the $7,000 wage base, the employer calculates FUTA on the full $4,000.
At a 0.6% effective rate, $4,000 multiplied by 0.6% equals $24.
This means the employer would generally owe $24 of FUTA tax for that employee.
FUTA Tax Calculation for Multiple Employees
The same calculation can be applied across an employer’s workforce.
Suppose a business has 10 employees and each employee earns more than $7,000 in FUTA taxable wages during the year.
Each employee reaches the full federal wage base.
The employer therefore has $70,000 in FUTA taxable wages for these 10 employees.
If the employer qualifies for the full state unemployment tax credit and has an effective FUTA rate of 0.6%, the calculation is $70,000 multiplied by 0.6%.
The result is $420 in FUTA tax.
This example also shows why employers need to track the wage base separately for every employee.
The $7,000 limit applies per employee rather than to the company’s total payroll.
What Is the FUTA Tax Credit?
The FUTA tax credit can significantly reduce an employer’s federal unemployment tax liability.
Although the standard FUTA rate is 6.0%, employers may generally receive a credit of up to 5.4% for qualifying contributions made to a state unemployment fund.
An employer that receives the maximum credit effectively pays FUTA at a rate of 0.6%.
To qualify for the maximum credit, an employer generally needs to pay required state unemployment taxes in full and on time and meet other federal requirements.
The state must also not be subject to a FUTA credit reduction that affects the employer.
The relationship between FUTA and state unemployment tax is therefore an important part of payroll tax management.
Paying state unemployment contributions can affect the employer’s final federal unemployment tax liability.
What Is a FUTA Credit Reduction State?
A FUTA credit reduction state is a state that has outstanding federal loans used to meet state unemployment benefit obligations and has not repaid those loans within the required period.
When a state is classified as a credit reduction state, employers in that state may receive a smaller FUTA credit.
A smaller credit results in a higher effective federal unemployment tax rate.
The standard maximum FUTA credit is 5.4%.
The regular credit reduction generally begins at 0.3% and can increase by another 0.3% for each additional year that qualifying federal unemployment loans remain unpaid.
Additional reductions can apply in certain situations.
For example, consider an employer that would normally receive the full 5.4% credit.
If the applicable state has a 0.3% credit reduction, the employer’s available credit would effectively be reduced to 5.1% for the affected wages.
Subtracting the 5.1% credit from the 6.0% FUTA rate produces an effective FUTA rate of 0.9% for those wages instead of the normal 0.6%.
Employers with wages in credit reduction states may therefore have a higher FUTA tax liability.
Credit reduction status can change from year to year.
The U.S. Department of Labor determines applicable credit reduction states after the relevant annual deadline, and the IRS provides information employers can use when preparing Form 940 and Schedule A.
What Is Form 940?
Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return. Employers use this IRS form to report their annual FUTA tax.
Form 940 helps an employer report payments to employees, FUTA-exempt payments, wages above the FUTA wage base, FUTA taxable wages, adjustments related to state unemployment tax, and the employer’s final FUTA tax liability.
Although FUTA liability is calculated during the year and deposits may be required quarterly, Form 940 is generally an annual federal tax return.
This is an important distinction because an employer may need to make FUTA deposits before the annual Form 940 is filed.
Employers operating in more than one state or paying wages in a FUTA credit reduction state may also need Schedule A of Form 940.
Accurate payroll records can make Form 940 preparation easier because employers need to know how much was paid to each employee, which payments were exempt, when each employee reached the FUTA wage base, how much state unemployment tax was paid, and how much FUTA tax was deposited during the year.
When Is FUTA Tax Due?
Employers generally calculate their FUTA tax liability quarterly even though FUTA is reported annually on Form 940.
The FUTA deposit requirement depends on the amount of undeposited FUTA liability.
If an employer’s FUTA tax liability for a quarter, including any amount carried forward from an earlier quarter, is $500 or less, the employer generally does not need to make a deposit at that time. Instead, the liability can be carried forward to the next quarter.
If the accumulated FUTA tax liability is more than $500, the employer generally needs to make an electronic federal tax deposit by the applicable deadline.
For the first quarter ending March 31, the regular FUTA deposit deadline is April 30. For the second quarter ending June 30, it is July 31. For the third quarter ending September 30, it is October 31. For the fourth quarter ending December 31, the regular deadline is January 31.
When a due date falls on a Saturday, Sunday, or legal holiday, the payment can generally be made on the next business day.
If the fourth-quarter liability plus any amount carried forward is $500 or less, the employer may generally pay the amount with Form 940 rather than making a separate deposit.
Employers should track their FUTA liability throughout the year rather than waiting until Form 940 is prepared.
FUTA Tax vs. SUTA Tax
FUTA and SUTA are both related to unemployment taxes, but they operate at different levels of government.
FUTA is the Federal Unemployment Tax Act and creates a federal unemployment tax paid by covered employers.
SUTA commonly refers to the State Unemployment Tax Act or state unemployment tax.
Some states use terms such as state unemployment insurance, or SUI, instead.
The FUTA tax rate and federal wage base are established at the federal level.
For 2026, the FUTA rate is 6.0% on the first $7,000 of FUTA taxable wages for each employee before applying an available credit.
State unemployment tax rates and wage bases can vary by state.
An employer’s state unemployment rate can also depend on factors such as its employment history and state-specific rules.
FUTA and SUTA are connected through the FUTA tax credit.
Employers that pay qualifying state unemployment taxes may receive a credit of up to 5.4% against the federal FUTA tax.
This can reduce the effective federal rate to 0.6%.
The simplest way to understand FUTA vs. SUTA is that FUTA is the federal part of the unemployment tax system, while SUTA is the state part.
Employers may have responsibilities under both systems.
FUTA Tax vs. FICA Tax
FUTA and FICA are both federal employment taxes, but they have different purposes and payment rules.
FUTA supports the federal-state unemployment compensation system.
FICA stands for the Federal Insurance Contributions Act and covers Social Security and Medicare taxes.
One major difference is who pays the tax.
FUTA is generally paid only by the employer and is not deducted from employee wages. FICA taxes generally include both an employee share and an employer share.
The taxes also use different rates and wage rules. FUTA has its own federal wage base, while Social Security has a separate annual wage base and Medicare generally does not have a wage base limit.
Employers should therefore calculate and track FUTA and FICA separately as part of payroll tax processing.
FUTA Tax vs. Federal Income Tax
FUTA tax should also not be confused with federal income tax.
Federal income tax is generally withheld from an employee’s wages based on applicable withholding rules and information such as the employee’s Form W-4.
The employer sends the withheld tax to the federal government.
FUTA is different. It is an employer-paid unemployment tax and generally does not reduce an employee’s take-home pay.
This distinction is important when reading a pay stub. An employee may see federal income tax, Social Security tax, and Medicare tax deductions, but FUTA is normally an employer expense rather than an employee deduction.
Is FUTA Tax Deducted From Employee Paychecks?
No. Employers should not deduct FUTA tax from employee wages.
FUTA is an employer-paid federal payroll tax. The employer calculates the applicable tax based on FUTA taxable wages and pays the tax from the employer’s funds.
This is different from payroll taxes that include an employee contribution.
Understanding this distinction can help employers avoid payroll errors and can also help employees understand why FUTA generally does not appear as a deduction on their pay stubs.
Common FUTA Tax Mistakes Employers Should Avoid
One common FUTA mistake is treating the tax as an employee deduction.
FUTA is generally paid by the employer, so it should not be withheld from an employee’s paycheck.
Another mistake is applying FUTA tax to every dollar an employee earns during the year. FUTA has a federal wage base of $7,000 per employee for 2026.
Once an employee reaches the applicable wage base, additional wages for that employee are generally not subject to FUTA for the rest of that calendar year.
Employers may also make mistakes by assuming that every business automatically receives the maximum 5.4% FUTA credit.
Eligibility for the full credit depends on state unemployment tax payments and other requirements.
Employers with wages in a credit reduction state may have a higher FUTA liability.
Confusing FUTA with SUTA is another potential problem. FUTA is federal, while SUTA or SUI is administered at the state level.
State tax rates, wage bases, filing requirements, and payment rules can differ from federal FUTA requirements.
Employers should also avoid assuming that all payments to workers are treated the same. Some payments can be exempt from FUTA, while others are taxable.
Worker classification, family employment, tax-exempt organizations, agricultural employment, household employment, and certain visa categories can involve special rules.
Finally, employers should not wait until the end of the year to think about FUTA.
Although Form 940 is an annual return, FUTA liability needs to be monitored during the year because deposits can be required when the accumulated liability exceeds the applicable threshold.
Frequently Asked Questions About FUTA Tax
What does FUTA stand for?
FUTA stands for Federal Unemployment Tax Act. It establishes a federal payroll tax that works with state unemployment systems to help fund unemployment compensation.
Who pays FUTA tax?
FUTA tax is generally paid by employers. It is not normally withheld from employees’ wages.
What is the FUTA tax rate for 2026?
The FUTA tax rate for 2026 is 6.0% on the first $7,000 of FUTA taxable wages paid to each employee.
Employers that qualify for the maximum 5.4% state unemployment tax credit generally have an effective FUTA rate of 0.6%.
What is the FUTA wage base for 2026?
The federal FUTA wage base for 2026 is $7,000 per employee.
Once an employee reaches $7,000 in FUTA taxable wages for the calendar year, additional wages paid to that employee are generally not subject to FUTA for that year.
What is the maximum FUTA tax per employee?
At the full 6.0% FUTA rate, the tax on $7,000 of FUTA taxable wages is $420.
However, an employer that qualifies for the full 5.4% credit generally has an effective rate of 0.6%, resulting in $42 of FUTA tax per employee who reaches the full wage base.
Do employees pay FUTA tax?
No. FUTA is generally an employer-paid tax. Employers should not deduct FUTA from employee wages.
Is FUTA a payroll tax?
Yes. FUTA is a federal payroll or employment tax paid by employers that meet the applicable requirements.
It is connected to the federal and state unemployment compensation system.
Is FUTA the same as SUTA?
No. FUTA is a federal unemployment tax, while SUTA generally refers to a state unemployment tax.
The two systems are related because qualifying state unemployment tax payments can provide an employer with a credit against FUTA.
Is FUTA the same as FICA?
No. FUTA supports the unemployment system, while FICA funds Social Security and Medicare. FUTA is generally employer-paid, while FICA normally includes both employer and employee contributions.
Is FUTA calculated on gross wages?
FUTA calculations begin with payments made to employees, but not every payment is necessarily subject to FUTA.
Employers need to subtract applicable FUTA-exempt payments and consider the $7,000 annual wage base for each employee.
Are independent contractors subject to FUTA tax?
Payments to true independent contractors are generally not employee wages subject to FUTA.
However, worker classification depends on the actual relationship between the business and the worker.
Businesses should apply the proper federal classification rules rather than relying only on a worker’s job title or contract.
Are nonprofit organizations exempt from FUTA?
Organizations described in section 501(c)(3) and exempt under section 501(a) are generally exempt from FUTA.
Other types of nonprofit organizations are not automatically exempt simply because they operate as nonprofits.
What form is used to report FUTA tax?
Employers generally report annual FUTA tax using Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Is Form 940 filed quarterly?
Form 940 is generally filed annually. However, employers calculate FUTA liability during the year, and quarterly deposits may be required depending on the amount of accumulated FUTA tax liability.
What happens when FUTA tax liability is $500 or less?
If the FUTA liability for a quarter, including any amount carried forward, is $500 or less, an employer generally carries the amount into the next quarter rather than making a deposit at that time.
Once the accumulated liability is more than $500, a deposit is generally required by the applicable deadline.
What is a FUTA credit reduction state?
A FUTA credit reduction state is a state that has outstanding federal unemployment loans and meets the conditions for a reduction in the normal FUTA credit.
Employers with affected wages may receive a smaller credit and therefore pay a higher effective FUTA tax rate.
The Bottom Line
FUTA tax is an employer-paid federal payroll tax that supports the unemployment compensation system in the United States.
FUTA works together with state unemployment programs to help provide unemployment benefits to eligible workers who lose their jobs.
For 2026, the standard FUTA tax rate is 6.0% on the first $7,000 of FUTA taxable wages paid to each employee.
Employers that qualify for the maximum 5.4% state unemployment tax credit generally have an effective FUTA tax rate of 0.6%.
At that rate, the FUTA tax for an employee who reaches the full $7,000 wage base is generally $42.
However, calculating FUTA tax involves more than multiplying wages by a tax rate.
Employers need to determine whether they are subject to FUTA, identify FUTA taxable wages, apply the federal wage base, account for exempt payments, determine the available state unemployment tax credit, monitor credit reduction states, calculate quarterly liabilities, make required deposits, and report the tax correctly on Form 940.
Accurate payroll records make this process easier. Employers should track taxable wages and unemployment tax obligations throughout the year so that FUTA calculations, deposits, and annual reporting are based on complete payroll information.
Payroll software can also help businesses organize employee wages, payroll taxes, and reporting information in one place.
With PayDay, employers can simplify payroll processing and maintain the payroll data needed to manage tax obligations more efficiently.
Understanding FUTA tax is an important part of managing payroll in the United States.
When employers understand how federal unemployment tax works alongside state unemployment tax, they are better prepared to calculate payroll liabilities accurately and meet their employment tax responsibilities.
