FUTA is the Federal Unemployment Tax Act, a federal tax employers pay to fund unemployment benefits. The rate is 6% on the first $7,000 of each employee's wages, reduced to an effective 0.6% for employers who pay their state unemployment tax on time. That comes to about $42 per employee per year.

Why is FUTA on my paycheck?

It shouldn't be. FUTA is paid entirely by the employer and is never withheld from wages. If you see it on a pay stub, it's almost certainly in a section showing employer-paid taxes rather than deductions from your pay, which some payroll systems display for transparency. Your net pay isn't reduced by it. A few states do require employees to contribute to state unemployment, but that's SUTA, not FUTA.

Only employers. Employees never pay FUTA and it is never deducted from their wages. Self-employed people and independent contractors don't pay it either, since FUTA applies to wages paid to employees.

How much is FUTA per employee?

$42 per employee per year for most employers, which is 0.6% of the $7,000 wage base. Employers who don't pay state unemployment tax on time, or who operate in a credit reduction state, pay more. In California for 2025 the net rate was 1.8%, or about $126 per employee.

What is a FUTA credit reduction state?

States that borrowed from the federal government to pay unemployment benefits and didn't repay by November 10. Employers there lose part of the 5.4% credit, raising their FUTA rate retroactively for the whole year. For 2025 the affected jurisdictions were California at 1.2% and the U.S. Virgin Islands at 4.5%. The list is published after the November deadline each year.

What happens if you don't pay FUTA on time?

A failure to deposit penalty on a sliding scale by how late the payment is, plus interest. Late filing of Form 940 carries a separate penalty. There's a knock-on effect too: paying state unemployment tax late can cost you part of the 5.4% credit, which raises your federal liability on top of the penalty itself.

Paper Trails > What Is Federal Unemployment Tax (FUTA)?

What Is Federal Unemployment Tax (FUTA)?

Federal unemployment tax, or FUTA, is a 6% employer-paid tax on the first $7,000 of wages you pay each employee in a year, which most employers reduce to an effective 0.6% by claiming a credit for state unemployment taxes paid on time. That works out to about $42 per employee per year. Employees never pay it and it's never withheld from their paychecks.

The rate is simple. Where it gets awkward is the state credit, which a handful of states don't get in full, and the deposit rules, which aren't the same as the filing schedule.

Key Takeaways from this Article

FUTA is paid entirely by the employer. Nothing comes out of the employee's paycheck.
The rate is 6% on the first $7,000 of each employee's wages, reduced to 0.6% for employers who pay state unemployment tax on time.
That credit is cut in states that owe the federal government money, which raises the cost per employee.
Form 940 is filed once a year, but deposits are due quarterly once your liability passes $500.
Most Maine employers land at the full 0.6%, since Maine is not a credit reduction state.

What is FUTA?

The Federal Unemployment Tax Act requires employers to pay a payroll tax that funds unemployment benefits. The money goes into a federal account that backs state unemployment insurance programs, covers extended benefits when unemployment is high, and pays the administrative cost of running the system.

The thing to fix in your head: FUTA is entirely an employer tax. It is not withheld from wages, it doesn't appear as an employee deduction, and an employee has no FUTA liability at all.

What is the Difference Between FUTA, SUTA, and FICA?

Three payroll taxes, three different purposes, and they get mixed up constantly.

	FUTA	SUTA	FICA
Who pays	Employer only	Employer, in most states	Employer and employee
What it funds	Federal unemployment system	State unemployment benefits	Social Security and Medicare
Rate	6%, usually 0.6% after credit	Set by each state	7.65% each side
Wage base	First $7,000	Set by each state	Social Security capped, Medicare uncapped
Form	940, annually	State form, usually quarterly	941, quarterly

FUTA and SUTA are connected. Paying your state unemployment tax on time is what earns you the FUTA credit, so falling behind on the state side quietly raises your federal bill too.

Who Has to Pay FUTA?

Most employers. You owe FUTA if you meet the IRS general test:

You paid $1,500 or more in wages during any calendar quarter, or
You had at least one employee, full-time, part-time, or temporary, for some part of a day in 20 or more different weeks during the year

Household employers owe FUTA once they pay $1,000 or more in cash wages in a quarter, which catches people employing a nanny or a regular housekeeper. Agricultural employers owe it at $20,000 in a quarter, or 10 or more farmworkers across 20 weeks.

Exempt: 501(c)(3) nonprofits, state and local governments, and tribal governments. Self-employed people and independent contractors aren't subject to it either, though misclassifying an employee as a contractor doesn't make the liability go away.

How is FUTA Calculated?

Start with 6% of the first $7,000 you pay each employee, which is $420 a year per person. Then subtract the credit.

Employers who pay their state unemployment tax in full and on time get a credit of up to 5.4%, bringing the effective rate down to 0.6%. That's roughly $42 per employee per year, and it's where most employers land.

Note the wage base is per employee, not per job. Someone who earns $7,000 by March generates no further FUTA for the rest of the year, which is why the tax lands heavily in the first quarter and tapers off.

What Are Credit Reduction States?

When a state borrows from the federal government to pay unemployment benefits and doesn't repay by November 10, employers in that state lose part of the 5.4% credit. The tax goes up accordingly, and it applies retroactively to wages paid all year.

For 2025, two jurisdictions were affected:

California, a 1.2% reduction, giving a net FUTA rate of 1.8%, or about $126 per employee
U.S. Virgin Islands, a 4.5% reduction, giving a net rate of 5.1%

New York and Connecticut were on the potential list earlier in the year and repaid their loans before the deadline, so neither carried a reduction for 2025. Maine has not been a credit reduction state.

The list changes annually and isn't settled until after November 10, so if you have employees in a borrowing state, don't assume last year's rate carries over. If you pay wages in more than one state, Schedule A of Form 940 is where this gets calculated.

How and When is FUTA Paid?

Form 940 is annual. The deposits are quarterly, and only once you've accumulated enough liability to trigger one.

Liability over $500 for the quarter: deposit by the quarterly due date
Liability of $500 or less: carry it forward to the next quarter
Total liability for the year of $500 or less: pay it with the annual return

Quarterly deposit deadlines are April 30, July 31, October 31, and January 31. Deposits go through the Electronic Federal Tax Payment System, the same as your 941 deposits.

Form 940 itself is due January 31, or the next business day if that's a weekend. Pay everything on time during the year and you get a grace period to February 10 for the filing.

FAQs: Federal Unemployment Tax

FUTA is the Federal Unemployment Tax Act, a federal tax employers pay to fund unemployment benefits. The rate is 6% on the first $7,000 of each employee's wages, reduced to an effective 0.6% for employers who pay their state unemployment tax on time. That comes to about $42 per employee per year.
It shouldn't be. FUTA is paid entirely by the employer and is never withheld from wages. If you see it on a pay stub, it's almost certainly in a section showing employer-paid taxes rather than deductions from your pay, which some payroll systems display for transparency. Your net pay isn't reduced by it. A few states do require employees to contribute to state unemployment, but that's SUTA, not FUTA.
Only employers. Employees never pay FUTA and it is never deducted from their wages. Self-employed people and independent contractors don't pay it either, since FUTA applies to wages paid to employees.
$42 per employee per year for most employers, which is 0.6% of the $7,000 wage base. Employers who don't pay state unemployment tax on time, or who operate in a credit reduction state, pay more. In California for 2025 the net rate was 1.8%, or about $126 per employee.
States that borrowed from the federal government to pay unemployment benefits and didn't repay by November 10. Employers there lose part of the 5.4% credit, raising their FUTA rate retroactively for the whole year. For 2025 the affected jurisdictions were California at 1.2% and the U.S. Virgin Islands at 4.5%. The list is published after the November deadline each year.
A failure to deposit penalty on a sliding scale by how late the payment is, plus interest. Late filing of Form 940 carries a separate penalty. There's a knock-on effect too: paying state unemployment tax late can cost you part of the 5.4% credit, which raises your federal liability on top of the penalty itself.

Where FUTA Costs More Than It Should

At $42 per employee, FUTA is rarely the tax anyone worries about. It becomes expensive in two situations, and both are avoidable.

The first is falling behind on state unemployment tax, which costs you part of the 5.4% credit and multiplies your federal bill. The second is having employees in a credit reduction state without knowing it, then finding the extra liability in January when Schedule A is calculated for the whole year.

We handle Form 940, the quarterly deposits, and the state unemployment filings that protect the credit as part of payroll and tax services, including for employers with people in several states. Pricing is on our pricing page.

Updated: October 2026

Written by: Jon Portanova

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