FUTA taxable wages are the first $7,000 of covered compensation you pay each employee during a calendar year. On that base, the Federal Unemployment Tax Act imposes a gross 6% tax paid entirely by the employer, with nothing withheld from the worker. Most employers who pay their state unemployment tax on time get a 5.4% credit, dropping the effective rate to 0.6% — about $42 per employee who earns at least $7,000 in the year.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements What trips employers up is not the rate but the wage definition: which payments land inside the $7,000 base and which stay outside it.
What Compensation Counts Toward the Wage Base
The statute defines wages broadly as all compensation for employment, including the cash value of anything paid in a form other than cash.2Office of the Law Revision Counsel. 26 USC 3306 – Definitions Regular salary, hourly pay, commissions, and performance bonuses are the obvious pieces. Several less obvious categories also count.
The fair market value of non-cash fringe benefits — a company car used personally, prizes, awards — gets added to FUTA wages. Employee tips are taxable too: when a worker reports cash tips of $20 or more in a calendar month, those tips fold into the FUTA wage figure.3Internal Revenue Service. Topic No. 761, Tips – Withholding and Reporting
The one that catches employers by surprise: an employee’s own 401(k) salary deferral is FUTA taxable. Even though the money never reaches the worker’s checking account, the tax code specifically prevents those deferrals from being excluded.4Office of the Law Revision Counsel. 26 USC 3306 – Definitions – Section: (r) Treatment of Certain Deferred Compensation Calculate FUTA on the gross pay, before the 401(k) reduction.
What You Can Exclude
Several employer-funded benefits are carved out of the FUTA wage base:
- Employer retirement contributions — actual matching and non-elective contributions into a qualified Section 401(a) plan trust. The employer’s match is exempt; the employee’s own deferral is not.5Office of the Law Revision Counsel. 26 USC 3306 – Definitions – Section: (b) Wages
- Employer-paid premiums for employee health, accident, or disability coverage under an established plan.5Office of the Law Revision Counsel. 26 USC 3306 – Definitions – Section: (b) Wages
- Qualified benefits elected through a Section 125 cafeteria plan, where employees choose between cash and certain tax-free benefits.6Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
- Employer-paid group-term life insurance, even for coverage above $50,000 (that excess does trigger Social Security and Medicare tax, but not FUTA).6Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
- Workers’ compensation benefits and dependent care assistance up to statutory limits.
When a payment sits in a gray area, the working question is whether it’s compensation for work performed or a benefit funded separately by the employer under an established plan.
How the $7,000 Per-Employee Cap Works
The FUTA wage base has been $7,000 since 1983 and is not indexed for inflation. You owe FUTA only on the first $7,000 of covered wages paid to each employee in the calendar year. Once a worker’s year-to-date pay crosses that line, your FUTA obligation for that person stops until January 1.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
The cap is per employee, not per payroll. Ten workers who each earn at least $7,000 produce up to $70,000 in FUTA taxable wages. For most full-time employees the cap is hit in the first few pay periods, so FUTA activity clusters early in the year.
Job Changes During the Year
When an employee leaves and starts at an unrelated employer, the $7,000 base resets. Each employer independently tracks the first $7,000 it pays. Someone who earned $50,000 at one job and then moves to a new company generates a fresh $7,000 FUTA obligation for the second employer, regardless of what the first one already paid.
Acquisitions and Successor Employers
When a business is sold, the general rule is that the buyer does not count wages the seller paid toward the $7,000 base. The exception is successor employer status under IRS rules: if you qualify, you can credit the predecessor’s wages so you don’t pay FUTA twice on the same employee’s earnings that year.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements The Form 940 instructions spell out the conditions.
Common Paymaster for Related Corporations
Related corporations that share employees can designate a common paymaster to handle wage payments. When a common paymaster pays all of a shared worker’s wages, the group applies a single $7,000 FUTA base for that employee rather than each corporation applying its own. The paymaster is responsible for depositing and reporting the tax, though each related corporation remains jointly liable if the paymaster fails to remit.7Internal Revenue Service. Common Paymaster
Who Owes FUTA and Who Doesn’t
Coverage depends on the type of workers you employ. You owe FUTA as a general employer if you paid at least $1,500 in wages during any calendar quarter in the current or prior year, or if you had at least one employee for some part of a day in 20 or more different weeks in either year. Part-time and temporary workers count toward the 20-week test; partners in a partnership do not.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
Agricultural employers are covered after paying $20,000 or more in cash wages to farm workers in any calendar quarter, or after employing 10 or more agricultural workers for at least part of a day in 20 different calendar weeks (not necessarily consecutive, and not necessarily the same 10 people).8U.S. Department of Labor. Unemployment Insurance Tax Topic Household employers owe FUTA once total cash wages to household employees reach $1,000 in any calendar quarter of the current or prior year.9Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Some employers are outside the tax entirely, not just under the threshold. Wages paid by Section 501(c)(3) religious, charitable, and educational organizations are not FUTA-covered, even though those wages may still owe Social Security and Medicare tax.10Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption Federal, state, and local government entities and their wholly owned instrumentalities are exempt. Certain family employment is also excluded: services performed by a child under 21 working for a parent, or by anyone employed by a spouse, son, or daughter.11Office of the Law Revision Counsel. 26 USC 3306 – Definitions – Section: (c) Employment
The Rate: 6% Gross, 0.6% After the State Credit
The statutory FUTA rate is 6% of each employee’s taxable wages up to the $7,000 base, which comes to $420 per employee at face value.12Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax Employers who pay their state unemployment taxes on time earn a credit of up to 5.4% against that federal rate.13Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax The credit is fixed at 5.4% regardless of the state’s actual rate, so experience-rated employers paying less than that at the state level still get the full federal credit as long as the state program is certified. Effective FUTA rate: 0.6%, or $42 per employee at the full $7,000 base.
Credit Reduction States
The math shifts if you operate in a credit reduction state. A state earns that designation when it borrows from the federal unemployment trust fund and doesn’t repay on time. Employers in the affected state lose part of the 5.4% credit and pay a higher effective FUTA rate.14Internal Revenue Service. FUTA Credit Reduction A 0.3% credit reduction cuts the credit to 5.1%, pushing your effective rate to 0.9% and your per-employee cost to $63. The Department of Labor publishes the annual list of affected states.15U.S. Department of Labor. FUTA Credit Reductions Additional tax owed under credit reduction gets reported on Schedule A of Form 940.
Filing Form 940 and Depositing Tax
FUTA is reported once a year on Form 940, but you may have to deposit quarterly.
Form 940 is due January 31 after the tax year ends, moving to the next business day if January 31 falls on a weekend or holiday.16Internal Revenue Service. Employment Tax Due Dates For the 2025 tax year, that pushes the deadline to February 2, 2026. Employers who deposited all FUTA tax on time throughout the year get an extra 10 days, making their deadline February 10, 2026.17Internal Revenue Service. Instructions for Form 940
On deposits: at the end of each calendar quarter, check your accumulated FUTA liability. If it exceeds $500, deposit by the last day of the following month. If it’s $500 or less, carry it forward and keep checking each quarter.18Internal Revenue Service. Depositing and Reporting Employment Taxes Many small employers stay below $500 until the fourth quarter and deposit only once.
All deposits must move by electronic funds transfer. Options include your IRS business tax account, IRS Direct Pay for businesses, and EFTPS.18Internal Revenue Service. Depositing and Reporting Employment Taxes Mailing a check does not satisfy the deposit requirement and can generate a penalty on its own.
Late deposit penalties escalate:
- 1 to 5 days late: 2% of the unpaid deposit.
- 6 to 15 days late: 5%.
- More than 15 days late: 10%.
- More than 10 days after the first IRS demand notice: 15%.
Deposits sent to an unauthorized financial institution, or paid directly with the return instead of by EFT, also draw a 10% penalty.19Internal Revenue Service. Failure to Deposit Penalty