Employers pay unemployment tax in two places: a federal tax under the Federal Unemployment Tax Act (FUTA) and a state tax under the State Unemployment Tax Act (SUTA). Both are calculated as a percentage of each worker’s wages up to a capped amount, and in almost every state, the money comes entirely from the employer rather than employee paychecks. For most businesses, the federal portion works out to about $42 per employee per year, while the state portion varies widely based on your location, industry, and layoff history.
The Federal Piece: FUTA
FUTA imposes a 6.0% tax on the first $7,000 of wages you pay each employee during a calendar year.1Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax The $7,000 cap is written into the statute and hasn’t changed in decades.2Office of the Law Revision Counsel. 26 USC 3306 – Definitions Once an employee crosses $7,000 in a given year, you stop owing FUTA on their additional wages.
The 6.0% headline rate is rarely what you actually pay. If you pay your state unemployment taxes on time, you receive a credit of up to 5.4% against the federal rate, dropping your effective FUTA rate to 0.6%.3Employment and Training Administration – U.S. Department of Labor. Unemployment Insurance Tax Topic At 0.6%, the maximum FUTA cost per employee is $42 per year. The credit is authorized under 26 U.S.C. § 3302, which caps total credits at 90% of the tax computed at a 6% rate.4Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax
Credit Reduction States
Some states borrow from the federal unemployment trust fund during downturns and don’t repay the loans within the required period. When that happens, the Department of Labor reduces the FUTA credit available to employers in those states, effectively raising the federal tax rate. For the 2025 tax year, California faced a 1.2% credit reduction and the U.S. Virgin Islands faced a 4.5% reduction, meaning employers there owed significantly more per employee in federal unemployment tax.5Federal Register. Notice of the Federal Unemployment Tax Act (FUTA) Credit Reductions Applicable for 2025 The list changes year to year and is published annually in the Federal Register.
The State Piece: SUTA
State taxes are where the real money is. Unlike FUTA, which primarily funds federal administrative costs and state loans, state unemployment taxes flow directly into the trust fund that pays benefits to workers who lose their jobs. Every state sets its own tax rate range, taxable wage base, and experience-rating formula, so two identical businesses in different states can face very different costs.
The taxable wage base (the maximum wages per employee subject to tax) ranges from $7,000 in states like Arkansas, California, and Florida to $68,500 in Washington for 2026.3Employment and Training Administration – U.S. Department of Labor. Unemployment Insurance Tax Topic A higher wage base means you keep paying state unemployment tax on a larger share of each employee’s earnings, which adds up for businesses with well-paid staff.
In most states, unemployment tax is entirely an employer expense. Alaska, New Jersey, and Pennsylvania are the exceptions: they require employees to contribute a small portion through payroll deductions. If you operate in one of those states, you’ll withhold the employee share the same way you withhold other payroll taxes.
Who Owes and Who Doesn’t
Most businesses with employees owe both FUTA and SUTA, but a few categories work differently.
Nonprofits. Organizations that qualify under Section 501(c)(3) of the Internal Revenue Code are exempt from FUTA entirely.2Office of the Law Revision Counsel. 26 USC 3306 – Definitions They still have state unemployment obligations, but they can usually choose between paying standard SUTA and being a “reimbursable” employer that pays the state back only when a former employee actually collects benefits. For low-turnover nonprofits, reimbursement is often cheaper.
Household employers. If you hire a nanny, housekeeper, or home health aide, FUTA applies only if you pay total cash wages of $1,000 or more in any calendar quarter. Once you cross that threshold, you owe FUTA on the first $7,000 of wages paid to each household employee at the same 6.0% rate with the same 5.4% credit.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide State thresholds are often lower.
Agricultural employers. Farms owe FUTA on farmworker wages only if you paid $20,000 or more in cash wages to farmworkers during any calendar quarter, or if you employed 10 or more farmworkers during at least part of a day in 20 or more different weeks.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Small operations below both thresholds are exempt from FUTA, though state rules may still apply.
Independent contractors. You don’t owe unemployment tax on payments to genuine independent contractors. The line between employee and contractor depends on how much control you have over the work. The IRS looks at behavioral control (do you direct how the work is done), financial control (do you control how the worker is paid, reimbursed, or equipped), and the type of relationship (written contract, benefits, ongoing arrangement).8Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? No single factor decides it. Misclassifying employees as contractors to avoid unemployment taxes triggers back taxes, penalties, and interest across multiple tax types at once.
Setting Up Your Accounts
Before you can file or pay anything, you need two things: a Federal Employer Identification Number (EIN) and a state unemployment insurance account.
Your EIN is a nine-digit number the IRS uses to identify your business for federal tax purposes. If you have employees, you’re required to have one.9Internal Revenue Service. Employer Identification Number You can apply online through the IRS website and receive the number immediately.
With your EIN in hand, register with your state’s workforce or labor agency to open a state unemployment insurance account. The forms typically ask for your business structure, the date you first paid wages, and a description of your primary business activity for industry classification. Most states handle this through online portals and will assign your initial tax rate within a few weeks.
How Your State Rate Gets Set
Every state uses an experience rating system that adjusts your SUTA rate based on how many former employees have collected benefits charged to your account. Employers who generate more claims pay higher rates.
New businesses without a track record are assigned a standard new employer rate, which in most states falls between roughly 1.0% and 3.0%. After a qualifying period (often two to three years), the state recalculates based on your actual claims history. Depending on that experience, your rate could drop as low as 0.06% or climb past 10% in states with the widest ranges. A stable workforce with few layoffs is the single most powerful tool for keeping the rate low.
Filing and Paying
Unemployment taxes run on two parallel calendars: quarterly for state taxes and FUTA deposits, and annual for your federal return.
State Quarterly Filings
SUTA reports and payments are due quarterly. The standard deadlines are:
- First quarter (January–March): due April 30
- Second quarter (April–June): due July 31
- Third quarter (July–September): due October 31
- Fourth quarter (October–December): due January 31
Each quarterly filing reports total wages paid, taxable wages up to the state wage base, and the tax due based on your assigned rate. Most states require electronic filing through the workforce agency’s online portal. Late payments trigger interest charges and can raise your tax rate in future years.
Federal FUTA Deposits
You file Form 940 only once a year, but FUTA deposits are due quarterly whenever your cumulative liability exceeds $500. The deposit deadline is the last day of the month following the quarter’s end (April 30, July 31, October 31, and January 31).10Internal Revenue Service. Employment Tax Due Dates If your total FUTA liability stays at $500 or below through the end of the year, you can pay it all when you file the annual return. Most employers make FUTA deposits through the Electronic Federal Tax Payment System (EFTPS), a free service from the Treasury.11Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
Annual Form 940
IRS Form 940 is the annual return that reconciles your FUTA liability for the year. It reports your total wages, taxable FUTA wages, state unemployment taxes paid, and the credit you’re claiming against the federal rate.12Internal Revenue Service. About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return The filing deadline is January 31 for the prior year’s taxes. If you deposited all your FUTA tax on time throughout the year, you get an additional 10 calendar days to file.10Internal Revenue Service. Employment Tax Due Dates Paying state taxes before the Form 940 deadline is critical, because the 5.4% credit depends on timely state payments.
What Late Payment Costs
Penalties escalate quickly. Failing to file Form 940 on time costs 5% of the unpaid tax for each month the return is late, up to 25%.13Internal Revenue Service. Failure to File Penalty Unpaid balances also accrue interest at the federal underpayment rate, which stood at 7% for the first quarter of 2026.14U.S. Department of Labor. IRC 6621 Table of Underpayment Rates
The worst consequence of late state payments isn’t the state penalty. It’s losing the 5.4% FUTA credit. If your state taxes aren’t paid on time, you owe the full 6.0% federal rate instead of 0.6%, multiplying your federal bill by ten.3Employment and Training Administration – U.S. Department of Labor. Unemployment Insurance Tax Topic
Intentional misreporting raises the stakes further. The IRS can impose a civil fraud penalty equal to 75% of any underpayment attributable to fraud, and if the agency proves fraud on any portion, the burden shifts to the employer to prove the rest wasn’t fraudulent.15Internal Revenue Service. Employment Tax Penalty, Fraud, and Identity Theft Procedures Criminal prosecution is also on the table for willful failures to file, pay, or report accurately.
Records to Keep
The IRS requires employers to keep all employment tax records, including unemployment tax records, for at least four years after the tax becomes due or is paid, whichever is later.16Internal Revenue Service. Topic No. 305, Recordkeeping Hold onto quarterly wage reports, SUTA payment confirmations, Form 940 filings, and any correspondence tied to unemployment claims. Some states impose longer retention periods, so check yours. If you’re audited or need to dispute an experience-rating calculation, these records are the only thing standing between you and an unfavorable outcome.