FUTA Employer Tax: Who Pays, Rates, Form 940, and Penalties

The Federal Unemployment Tax Act imposes a payroll tax that employers alone pay: 6.0% on the first $7,000 of wages paid to each employee per calendar year. Most employers claim a state credit of up to 5.4%, which drops the FUTA employer tax to an effective 0.6%, or a maximum of $42 per worker per year. Nothing comes out of the employee’s paycheck.¹

Who Has to Pay FUTA

The IRS uses three tests. Meet any one, and you owe FUTA for the rest of that year and all of the next.

General Test

You owe FUTA if you paid wages of $1,500 or more in any calendar quarter of the current or prior year, or if you had at least one employee for any part of a day in 20 or more different weeks during either year.² The 20 weeks don’t need to be consecutive, and it doesn’t have to be the same person each week. Full-time, part-time, and temporary employees all count. Partners in a partnership do not.

Household Employer Test

If you employ workers in your home, such as nannies, housekeepers, gardeners, or private cooks, you owe FUTA once you pay $1,000 or more in cash wages to household employees in any calendar quarter.³

Agricultural Employer Test

Farm operations have higher thresholds. FUTA applies if you paid $20,000 or more in cash wages to farmworkers during any calendar quarter, or if you employed 10 or more farmworkers for at least part of a day in 20 different weeks. Each of those days has to fall in a separate calendar week.³

Who Is Exempt

Some employers owe no FUTA at all. Section 501(c)(3) nonprofits, including religious, charitable, and educational organizations, are fully exempt. So are federal, state, and local governments and Indian tribal governments.⁴

Family wages are also outside FUTA. Pay to your spouse, your child under 21, or your parent is not subject to the tax, and neither is pay to a child under 21 working in a parent’s business.⁴

Sole proprietors and partners don’t pay FUTA on their own earnings; the tax reaches only wages paid to employees. Payments to independent contractors sit outside FUTA entirely, because contractors are not employees. If you pay someone on a 1099 basis and that person controls how the work gets done, those payments don’t count.⁵

What Counts as Wages, and the $7,000 Cap

FUTA applies only to the first $7,000 you pay each employee in a calendar year. Once someone crosses that mark, you owe nothing more on that person for the rest of the year.⁴

“Wages” is defined broadly. It includes salaries, hourly pay, commissions, bonuses, sick pay, and vacation pay. One trap: employee 401(k) elective deferrals are included in the FUTA wage base even though they reduce income tax. The statute treats them as wages for FUTA purposes.⁴

Certain items are excluded from the wage base, including payments under an employer plan for sickness, accident disability, medical expenses, or death benefits, along with qualified educational assistance and qualified transportation benefits.⁴

Rate, State Credit, and Credit Reduction States

The gross FUTA rate is 6.0% on the first $7,000, which would be $420 per employee at the maximum. Employers who pay their state unemployment taxes in full and on time receive a credit of up to 5.4%, cutting the effective federal rate to 0.6% and capping the annual cost at $42 per worker.⁶

Timing matters. If you pay state unemployment taxes after the Form 940 filing deadline, the IRS allows only 90% of the credit, or 4.86% instead of the full 5.4%.

Some states borrow from the federal government to fund their unemployment benefits. When a state doesn’t repay the loan within two years, it becomes a credit reduction state, and employers there lose part of the 5.4% credit. The reduction starts at 0.3% in the first year and grows by another 0.3% each additional year the debt stays unpaid.⁶

For tax year 2025, California carries a 1.2% credit reduction and the U.S. Virgin Islands carries a 4.5% reduction.⁷ A California employer receives a 4.2% credit instead of 5.4%, so the effective FUTA rate becomes 1.8% and the per-employee ceiling rises to $126. The extra tax is treated as a fourth-quarter liability, due with your Form 940.

Depositing FUTA During the Year

Deposits follow a quarterly schedule keyed to your running liability. If your FUTA tax exceeds $500 in any quarter, you must deposit electronically by the last day of the month after that quarter ends.⁸ First-quarter tax (January through March) is due by April 30, and so on.

If a quarter’s liability stays at $500 or less, roll it into the next quarter. Keep rolling until the running total tops $500, then deposit. If your total FUTA tax for the whole year comes in under $500, you can pay it with your Form 940 rather than making a separate deposit.²

Filing Form 940

You reconcile FUTA once a year on Form 940.⁹ To fill it out you need your EIN, total wages paid for the year, the portion of those wages above $7,000 per employee, and the amount you paid into each state’s unemployment fund.

The standard deadline is January 31 of the following year. For tax year 2025 that falls on a Saturday, so the deadline moves to February 2, 2026. Employers who deposited all their FUTA tax on time through the year get an extra week, until February 10, 2026.¹⁰ Electronic filing is preferred.

If you operate in more than one state, or in a credit reduction state, you also complete Schedule A (Form 940), which breaks down your taxable wages by state and figures any extra tax owed from the reduction.

Late Deposit Penalties

Missing a deposit deadline triggers a tiered penalty based on how many calendar days you’re late:¹¹

1 to 5 days late: 2% of the unpaid deposit
6 to 15 days late: 5% of the unpaid deposit
More than 15 days late: 10% of the unpaid deposit
More than 10 days after an IRS notice demanding payment: 15% of the unpaid deposit

Interest accrues on unpaid balances on top of the penalty. By the time you hit the 15% tier the IRS has already sent a formal notice, so the obligation isn’t ambiguous.

Fixing Mistakes and Claiming Refunds

To correct a filed Form 940, file a new one with the “Amended” box checked in the Type of Return section.¹² Common errors involve miscalculating the wage base, failing to exclude exempt wages, or applying the wrong credit reduction rate.

If you overpaid, claim a refund on Form 843. The window is generally the later of three years from when you filed the return or two years from when you paid the tax. After that, the overpayment is lost.¹³

Recordkeeping

Keep employment tax records, including FUTA records, for at least four years after filing your fourth-quarter return for that year.¹⁴ At a minimum, hold on to total wages paid to each employee, the taxable portion subject to FUTA, deposit dates and amounts, and state unemployment tax payments.

If You Buy Another Business

Buy substantially all the assets of another business and immediately hire employees who worked for the prior owner, and you’re treated as a successor employer. Wages the previous owner already paid to those employees during the same calendar year count toward the $7,000 FUTA base, so you don’t restart at zero for each transferred worker.⁴ Both the predecessor and the successor must qualify as FUTA employers during the year of the acquisition for this rule to apply. Without it, the same wages could be taxed twice.

1
Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax
2
Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
3
Internal Revenue Service. Publication 926 – Household Employer’s Tax Guide
4
Office of the Law Revision Counsel. 26 USC 3306 – Definitions
5
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee
6
Internal Revenue Service. FUTA Credit Reduction
7
Federal Register. Notice of the Federal Unemployment Tax Act (FUTA) Credit Reductions Applicable for 2025
8
Internal Revenue Service. Depositing and Reporting Employment Taxes
9
Internal Revenue Service. About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
10
Internal Revenue Service. Instructions for Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
11
Internal Revenue Service. Failure to Deposit Penalty
12
Internal Revenue Service. Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
13
Internal Revenue Service. Time You Can Claim a Credit or Refund
14
Internal Revenue Service. Employment Tax Recordkeeping