The unemployment payroll tax is really two taxes stacked on top of each other. At the federal level, the Federal Unemployment Tax Act (FUTA) charges employers 6.0% on the first $7,000 of each employee’s annual wages, though a credit for state contributions usually brings the effective rate down to 0.6%, or about $42 per employee per year.1Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements On top of that, each state charges its own unemployment tax with a rate and wage base that depend on where the business operates and how often its former workers have filed claims. FUTA is almost always paid entirely by the employer; state tax is too, with three exceptions.
Why There Are Two Unemployment Taxes
FUTA and state unemployment tax (commonly called SUTA, though the actual name varies) do different jobs. FUTA funds the administrative machinery that keeps state programs running, pays the federal share of extended benefits during high-unemployment periods, and maintains a loan fund states can borrow from when their reserves run dry.2Employment & Training Administration. Unemployment Insurance Tax Topic It does not pay regular weekly benefit checks. That is the state’s job, funded by state unemployment tax.
Every dollar collected flows into the federal Unemployment Trust Fund, where each state keeps its own account earmarked exclusively for benefit payments.3U.S. Department of Labor. Unemployment Insurance Program Letter 22-96 – The Immediate Deposit and Withdrawal Standards
Who Owes the Tax
FUTA kicks in quickly. You owe it if you paid at least $1,500 in total wages during any calendar quarter, or if you had at least one employee working on any day of the week for 20 or more weeks in a calendar year.2Employment & Training Administration. Unemployment Insurance Tax Topic The weeks do not have to be consecutive, and the employee does not have to be the same person each week. Any business with year-round staff qualifies.
State thresholds are usually lower. Some states require registration the moment you pay any wages; others set modest quarterly minimums. Registering with your state workforce agency at first hire is the safest path.
Household employers (nannies, housekeepers, other domestic workers) generally face a higher quarterly wage threshold before FUTA applies, and agricultural employers have their own separate test based on total wages or worker count. The IRS Form 940 instructions list the specific thresholds.4Internal Revenue Service. Instructions for Form 940
FUTA is always an employer-only tax.5Internal Revenue Service. Understanding Employment Taxes State unemployment tax usually is too, but Alaska, New Jersey, and Pennsylvania also require small employee contributions. If you have workers in any of those three states, you have to withhold and remit their share on top of your own.
The Federal Rate and the 5.4% Credit
FUTA applies only to the first $7,000 you pay each employee in a calendar year.6Office of the Law Revision Counsel. 26 USC 3306 – Definitions Once year-to-date wages cross that line, you stop owing federal unemployment tax on that person for the rest of the year. For an employer with stable staff, most FUTA liability lands in the first quarter.
The gross rate is 6.0%. Employers who pay their state unemployment tax on time and in full get a credit of up to 5.4%, dropping the effective rate to 0.6%.7Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax That works out to $42 per employee per year ($7,000 × 0.006).8Internal Revenue Service. FUTA Credit Reduction The credit is claimed on Form 940 and is not automatic. Late state payments can shrink it, and so can living in a credit reduction state.
State Wage Bases and Experience Rating
State taxable wage bases are much less uniform than the federal $7,000 floor. Several states match that floor. Others go far higher. Washington taxes the first $78,200 of each employee’s wages. The spread matters. A 2% rate on a $7,000 base costs $140 per employee; the same rate on a $50,000 base costs $1,000.
The rate itself comes from experience rating. Employers whose former workers file more claims pay higher rates; employers with stable workforces earn lower rates over time.9Department of Labor. Conformity Requirements for State UC Laws Experience Rating Depending on the state and the employer, rates run from 0% for the best performers up to roughly 12% for the worst. That range is wide enough to create a real financial reason to reduce turnover.
New Employer Rates
A new business has no claims history, so states assign a default rate that usually falls somewhere between 1% and 4%, though some states set new employer rates below 1% and a handful start closer to 6% for certain industries. After two to three years, the state adjusts your rate based on actual claims experience.
Voluntary Contributions
About half the states let employers make voluntary payments into their unemployment account to improve their experience rating. If a lump-sum payment now pushes your reserve balance into a lower rate bracket, the annual savings can exceed the payment. Federal law requires the contribution to be made within 120 days of the start of the rate year, and many states set earlier deadlines. Worth running the numbers after a year with unusual layoffs that temporarily inflated your rate.
Credit Reduction States
The 5.4% credit can shrink if your state borrowed from the federal Unemployment Trust Fund and has not repaid the loan. When a state carries an outstanding balance on January 1 for two consecutive years and fails to repay by November 10 of the second year, it becomes a credit reduction state. Employers in that state lose 0.3% of their FUTA credit for the first year, another 0.3% for the second, and so on until the debt is paid.8Internal Revenue Service. FUTA Credit Reduction
The cost is direct. A 0.3% reduction on the $7,000 wage base adds $21 per employee per year. A 0.9% reduction adds $63 on top of the baseline $42. The additional amount is treated as a fourth-quarter liability and is reported on Schedule A of Form 940. The IRS publishes the current list of affected states each fall.8Internal Revenue Service. FUTA Credit Reduction
Filing and Deposit Deadlines
Federal unemployment tax is reported annually on Form 940, generally due January 31 of the following year.10Internal Revenue Service. About Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return If that date falls on a weekend, the deadline shifts to the next business day. Employers who deposited all FUTA on time throughout the year get ten extra days to file. For the 2025 tax year, the filing deadline is February 2, 2026.4Internal Revenue Service. Instructions for Form 940
Deposits are not annual, though. If your cumulative FUTA liability tops $500 in any quarter, you must deposit the tax by the last day of the month after that quarter ends.11Internal Revenue Service. Depositing and Reporting Employment Taxes For most employers, that means a deposit is due in April for Q1, and FUTA is largely paid off by midyear once every employee has crossed the $7,000 threshold. If your annual liability stays at or below $500, you can pay the full amount with your Form 940.
Federal deposits must go through the Electronic Federal Tax Payment System (EFTPS), a free Treasury service.12Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System Mailing a check to the IRS instead can trigger a failure-to-deposit penalty of up to 10%, even if the payment arrives on time.
State unemployment tax is reported and paid quarterly through each state’s online portal. Deadlines vary, but most follow the same end-of-month-after-quarter-end pattern. Late state payments carry interest and can shrink the FUTA credit that keeps your federal rate at 0.6%, so missing a state deadline costs you on both sides.
Two Situations That Change What You Owe
Contractor Misclassification
Unemployment tax applies only to employees, not to independent contractors. The IRS looks at three categories to decide which is which: behavioral control (whether you direct how the work is done), financial control (whether you control business aspects like expenses and payment methods), and the type of relationship (contracts, benefits, expectation of permanence).13Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? No single factor decides it.
If the IRS reclassifies contractors as employees, you owe back FUTA and FICA plus penalties. The assessment typically includes 1.5% of the wages paid to misclassified workers for income tax withholding failures (or 3% if you did not file the required information returns), plus 20% to 40% of the employee’s share of FICA that was never withheld. It applies per worker and can reach back multiple years. When you are genuinely unsure, you or the worker can file Form SS-8 for a formal determination.14Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Buying a Business
When you acquire another company, the seller’s unemployment tax experience may come with the deal. If you buy substantially all of a business’s assets so the prior owner can no longer operate, states that allow experience transfers will assign you the predecessor’s claims history, which drives your rate going forward.15U.S. Department of Labor. Transfers of Experience If you buy only part of the business, the transferred experience is typically proportional to the payroll or employees you took on.
On the federal side, wages the predecessor already paid to an employee count toward that employee’s $7,000 FUTA wage base for the year, so you do not double-pay FUTA on the same wages.6Office of the Law Revision Counsel. 26 USC 3306 – Definitions The practical point: review the seller’s claims history before closing. A bad experience rating can quietly add thousands of dollars in annual payroll costs.
A Note for Nonprofits
Organizations with 501(c)(3) status have an option most employers do not. Instead of paying quarterly state unemployment tax at an assigned rate, qualifying nonprofits can elect to reimburse the state dollar-for-dollar for any actual unemployment benefits paid to their former employees.16Office of the Law Revision Counsel. 26 USC 3309 – State Law Coverage of Services Performed for Nonprofit Organizations and Governmental Entities In stable years, reimbursement can cost much less than the standard tax. In a year with mass layoffs, the bill can spike well past what the tax would have been. Many nonprofits use third-party administrators to pool the risk.