The federal unemployment tax, imposed on employers under the Federal Unemployment Tax Act (FUTA) at 26 U.S.C. §§ 3301–3311, is an excise tax that funds the administrative side of the country’s unemployment insurance system. The statutory rate is 6% on the first $7,000 of each employee’s annual wages, but employers who pay their state unemployment tax on time receive a credit of up to 5.4%, cutting the effective rate to 0.6% and the annual cost to roughly $42 per worker.1Office of the Law Revision Counsel. 26 U.S.C. 3301 – Rate of Tax2Office of the Law Revision Counsel. 26 U.S.C. 3302 – Credits Against Tax Workers never see FUTA on a paycheck. It is not withheld from wages, and the tax itself does not pay unemployment benefits directly.
What FUTA Revenue Actually Pays For
The money the IRS collects under FUTA goes to three places. It covers the administrative costs of running the unemployment insurance program in every state, funds the federal government’s share of Extended Benefits during downturns, and provides loans to states whose unemployment trust funds run dry.3EveryCRSReport.com. Unemployment Compensation: The Fundamentals of the Federal Unemployment Tax The Treasury Department manages the funds through the Unemployment Trust Fund established under 42 U.S.C. § 1104, holding each state’s balances in its own account and investing them in government securities.4Office of the Law Revision Counsel. 42 U.S.C. 1104 – Unemployment Trust Fund
The weekly checks that unemployed workers receive come from state programs, not from FUTA. States collect their own unemployment taxes on top of FUTA and set their own rules on eligibility, weekly amounts, and duration.
Which Employers Owe the Tax
Under the general rule, an employer owes FUTA if either of two tests is met: paying at least $1,500 in wages during any calendar quarter, or having at least one employee for some part of a day in 20 or more different weeks during the year. Meeting either one triggers the obligation.5Internal Revenue Service. Topic No. 759 – Form 940 Filing and Deposit Requirements
Different thresholds apply to specific categories of workers:
- Household employers owe FUTA if they pay a nanny, caregiver, housekeeper, or similar worker $1,000 or more in cash wages during any calendar quarter. The tax then applies to the first $7,000 of that worker’s wages for the year.6Internal Revenue Service. Publication 926 (2026) – Household Employer’s Tax Guide
- Agricultural employers owe FUTA on farmworker wages only if they paid $20,000 or more in cash wages during any calendar quarter, or employed 10 or more farmworkers for some part of a day in 20 or more weeks. Wages paid to H-2A visa holders count toward that threshold but are not themselves subject to the tax.7Internal Revenue Service. Publication 15 (2026) – Employer’s Tax Guide
- Nonprofits exempt under Section 501(c)(3) of the Internal Revenue Code are automatically exempt from FUTA, and the exemption cannot be waived. Other categories of tax-exempt organizations do not get this treatment.8Internal Revenue Service. Exempt Organizations – What Are Employment Taxes
How the 5.4% Credit Works
The 6% headline rate is almost never what an employer actually pays. Timely payment of state unemployment tax earns a credit of up to 5.4% against the federal rate. That drops the effective rate to 0.6% and puts the maximum federal cost at about $42 per employee per year on the $7,000 wage base.2Office of the Law Revision Counsel. 26 U.S.C. 3302 – Credits Against Tax Miss state deadlines and part of that credit disappears, pushing the bill back toward the statutory ceiling of $420 per worker.
The wage base itself has not moved in decades. FUTA still applies only to the first $7,000 an employer pays each worker during the year, a figure unchanged since 1983. State wage bases run higher, in some cases well above $70,000, so state unemployment tax is often the larger obligation.
When the Credit Gets Reduced
There is a second way employers lose part of the 5.4% credit, and it has nothing to do with their own compliance. When a state borrows from the federal Unemployment Trust Fund and carries an outstanding balance on January 1 for two consecutive years without repaying in full by November 10 of the second year, every employer in that state loses part of the credit. The reduction starts at 0.3% the first year and grows by another 0.3% for each additional year the state stays in debt.9Internal Revenue Service. FUTA Credit Reduction
The dollar effect adds up quickly. A 0.3% reduction lifts the effective FUTA rate from 0.6% to 0.9%, adding $21 per employee. A 1.2% reduction pushes the effective rate to 1.8%, costing employers $126 per worker instead of $42. For the 2025 tax year, California employers faced a 1.2% credit reduction and the U.S. Virgin Islands faced a 4.5% reduction. Connecticut and New York both repaid their outstanding federal loans before the November deadline and avoided any reduction.10Federal Register. Notice of the FUTA Credit Reductions Applicable for 2025
Employers in a credit reduction state report the additional tax on Schedule A of Form 940. The cost is easy to overlook because it doesn’t appear until the annual return is filed, but for a business with a large payroll the difference is material.
Filing and Payment Deadlines
FUTA is reported once a year on Form 940, due January 31 of the year following the tax year. If every required quarterly deposit was made on time, the filing deadline extends by 10 calendar days. When a due date lands on a weekend or federal holiday, the return can be filed the next business day.11Internal Revenue Service. Employment Tax Due Dates
Deposits run on a quarterly cycle, but only once the running total is large enough. If accumulated FUTA liability passes $500 during a quarter, the tax must be deposited by the end of the month following that quarter. If the liability stays at $500 or below, it carries forward to the next quarter, deposited whenever it crosses the threshold or paid with the annual return.12Internal Revenue Service. Depositing and Reporting Employment Taxes
Missing deadlines triggers penalties. A late Form 940 draws 5% of the unpaid tax per month or partial month the return is overdue, capped at 25%. A separate 0.5% monthly penalty applies to any tax that remains unpaid after the due date, also capped at 25%. Interest accrues on top of both. The IRS will waive these penalties when the employer can show reasonable cause for the delay.7Internal Revenue Service. Publication 15 (2026) – Employer’s Tax Guide
Where FUTA Ends and State Tax Begins
FUTA is only half of an employer’s unemployment tax burden. Every state runs its own unemployment insurance program with its own tax, wage base, and rate schedule. State rates depend on each employer’s own claims history through a system called experience rating: an employer with few layoffs pays a lower rate than one with frequent turnover.
The federal side, in other words, is the smaller and more predictable piece. FUTA sets a uniform national floor at 0.6% of the first $7,000 per employee for compliant employers, and the state tax handles the rest.3EveryCRSReport.com. Unemployment Compensation: The Fundamentals of the Federal Unemployment Tax Paying the state tax on time is not just a state law obligation. It is what preserves the 5.4% credit that keeps the federal bill at $42 per worker instead of $420.