How to Calculate FUTA Tax: Rate, Credit Reductions, and Due Dates

To calculate FUTA tax, multiply each employee’s first $7,000 of wages by your effective federal unemployment tax rate, then add the results across your workforce. For most employers, that effective rate is 0.6%, which caps the tax at $42 per employee per year. The statutory rate is actually 6%, but employers who pay their state unemployment taxes in full and on time claim a credit of up to 5.4% against it.¹

The Three-Step Calculation

Step 1: Find Each Employee’s FUTA-Taxable Wages

For every worker, add up the FUTA-taxable wages you paid during the calendar year, but stop counting once cumulative wages reach $7,000.² An employee who earns $80,000 contributes the same $7,000 in taxable wages as one who earns $10,000. A seasonal worker paid $4,000 contributes $4,000. Certain compensation is excluded before you apply the cap, covered further down.

Step 2: Apply Your Effective Rate

Multiply each employee’s taxable wages by the rate that applies to your state. If you qualify for the full 5.4% state credit, that rate is 0.6%.

Full-year employee earning above $7,000: $7,000 × 0.006 = $42.00
Seasonal worker earning $4,000: $4,000 × 0.006 = $24.00
Employer in a state with a 0.3% credit reduction: $7,000 × 0.009 = $63.00

Step 3: Add It Up

Total the individual amounts across everyone on payroll. A company with 25 full-year employees in a state with no credit reduction would owe 25 × $42 = $1,050 for the year. Track this running total quarterly, because it drives your deposit schedule.

Getting the Effective Rate Right

The 5.4% credit is available as long as your state’s unemployment program is federally certified and you have no outstanding late payments to the state.¹ Fall behind on state unemployment tax and you lose part or all of the credit, pushing your effective FUTA rate above 0.6%.

Credit Reduction States

When a state borrows from the federal government to cover unemployment benefits and fails to repay within two years, the IRS reduces the available credit for employers in that state. The reduction starts at 0.3% in the first year and grows by another 0.3% for each additional year the debt remains unpaid, with additional reductions possible in the third and fifth years if the state hasn’t met certain repayment benchmarks.³

A 0.3% reduction raises your effective rate from 0.6% to 0.9% and your per-employee maximum from $42 to $63. The IRS publishes the list of credit reduction states each November, after states have had a chance to repay their loans by the November 10 deadline. Check the IRS credit reduction page before you file Form 940 to see whether your state is on it.³

What Doesn’t Count Toward the $7,000

Several common categories of pay are excluded from FUTA-taxable wages, so subtract them from an employee’s gross pay before applying the $7,000 cap.⁴

Employer nonelective and matching contributions to SEP-IRAs and SIMPLE plans are exempt. Salary reduction contributions the employee directs into a SARSEP or SIMPLE plan are still subject to FUTA.
Qualified scholarship amounts used for tuition, fees, books, and required course materials are excluded. Amounts paid for teaching or research the scholarship requires are taxable.
Non-cash employee achievement awards are excluded up to $400, or $1,600 under a qualified plan. Cash and gift cards don’t qualify.
Employer payments under a plan for medical and hospitalization expenses, or insurance covering those expenses, are not subject to FUTA.

Do You Owe FUTA at All?

Before running the calculation, confirm you’re actually subject to the tax. Under the general test, you must file Form 940 and pay FUTA if either of these is true during the current or prior year:⁵

You paid $1,500 or more in total wages in any calendar quarter.
You had at least one employee for some part of a day in 20 or more different weeks. Count full-time, part-time, and temporary workers; don’t count partners in a partnership.

Meeting either test makes you subject to FUTA for the entire year. Household employers use a different threshold: you owe FUTA on household employees once you pay $1,000 or more in cash wages to all household workers in any calendar quarter, after which the same $7,000 wage base and 0.6% effective rate apply.⁶ Agricultural employers have their own separate threshold covered in IRS Publication 51.

Some employers and workers sit outside FUTA entirely. Section 501(c)(3) religious, charitable, and educational organizations owe no FUTA on their employees’ wages.⁷ Wages a sole proprietor pays to their own child under 21, or to their parent, are also exempt, though this disappears once the business is a corporation or estate.⁸ Direct sellers and licensed real estate agents paid on sales rather than hours, with a written contract stating they aren’t employees, are treated as self-employed and generate no FUTA.⁹

If You Acquired the Business Mid-Year

When you acquire substantially all the property used in another employer’s business and immediately continue employing one or more of that business’s workers, you may qualify as a successor employer.¹⁰ This changes the calculation: you can count wages the previous employer already paid to those continuing employees toward the $7,000 wage base, provided the previous employer was required to file Form 940.

If the prior business paid an employee $5,000 before you acquired it, you owe FUTA only on the next $2,000 of that employee’s wages for the rest of the year. On Form 940, you check box b to identify yourself as a successor employer and include the predecessor’s wages when figuring total payments in excess of the FUTA wage base.

When to Pay What You Calculated

FUTA is reported annually on Form 940 but deposited quarterly whenever your running total crosses a threshold.¹¹

If your cumulative FUTA liability exceeds $500 during any quarter, deposit the tax by the last day of the month after that quarter ends: April 30, July 31, October 31, and January 31 for the four quarters.
If a quarter’s liability is $500 or less, carry it forward and combine it with the next quarter’s until the running total exceeds $500.
If total FUTA for the entire year is $500 or less, you can pay it with your Form 940 instead of making a separate deposit.

Deposits go through the Electronic Federal Tax Payment System (EFTPS). Form 940 itself is due January 31 of the following year, with an extra 10 days (to February 10) if you deposited all FUTA tax on time throughout the year.¹⁰

1
Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax
2
Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax
3
Internal Revenue Service. FUTA Credit Reduction
4
Internal Revenue Service. Employer’s Supplemental Tax Guide
5
Internal Revenue Service. Topic No. 759, Form 940 – Employer’s Annual Federal Unemployment Tax Return
6
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
7
Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption
8
Internal Revenue Service. Family Employees
9
Internal Revenue Service. Statutory Nonemployees
10
Internal Revenue Service. Instructions for Form 940
11
Internal Revenue Service. Depositing and Reporting Employment Taxes