FUI tax is a common misspelling of FUTA tax, short for the Federal Unemployment Tax Act. It’s a payroll tax employers pay at a gross rate of 6.0% on the first $7,000 of each employee’s annual wages, though most employers end up paying an effective 0.6% after claiming the state unemployment tax credit. Workers pay none of it; the entire cost sits with the employer.
What the Tax Pays For
FUTA money doesn’t go into the weekly unemployment checks laid-off workers receive. Those benefits come from separate state unemployment trust funds financed by state unemployment taxes. FUTA covers two other things: the administrative costs of running state unemployment offices and job placement programs, and the federal share of extended unemployment benefits during economic downturns.
Who Owes FUTA
The IRS applies two tests, and meeting either one creates a filing obligation. You look at both the current calendar year and the prior year, so a business that qualified last year still owes this year even if payroll has since shrunk.
- General test: You paid total wages of $1,500 or more in any single calendar quarter of 2025 or 2026.
- 20-week test: You had at least one employee for any part of a day during 20 or more different weeks in 2025, or 20 or more different weeks in 2026. The weeks don’t need to be consecutive, and the worker counted doesn’t have to be the same person each week.
Both tests count full-time, part-time, and temporary workers. In a partnership, the partners themselves don’t count as employees for this purpose.1Internal Revenue Service. Topic No. 759, Form 940 Filing and Deposit Requirements
Household Employers
If you hire a nanny, housekeeper, private caregiver, or other household worker, you owe FUTA only if you paid total cash wages of $1,000 or more in any calendar quarter of 2025 or 2026. The tax still applies to the first $7,000 in cash wages per worker.2Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Agricultural Employers
Farm employers owe FUTA if they paid at least $20,000 in wages during any calendar quarter, or if they employed 10 or more farm workers on at least one day in each of 20 different weeks during the year.
Who Is Exempt
Organizations recognized under Section 501(c)(3) of the Internal Revenue Code, including most charities, religious organizations, and educational nonprofits, are completely exempt from FUTA. The exemption is automatic and cannot be waived.3Internal Revenue Service. Exempt Organizations: What Are Employment Taxes? State and local government employers are also exempt. Every other employer with a payroll that meets one of the tests above owes the tax.
The Rate and the $7,000 Wage Base
The gross FUTA rate is 6.0%, set by federal statute.4Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax It applies only to the first $7,000 you pay each employee during the calendar year. Once a worker’s cumulative pay crosses $7,000, every additional dollar that year is exempt from FUTA.5Office of the Law Revision Counsel. 26 USC 3306 – Definitions
At the full 6.0% rate, the maximum FUTA tax per employee would be $420 a year. Almost no employer actually pays that, because of the state credit described below.
Taxable wages include most cash compensation: salaries, hourly pay, commissions, and bonuses. The statute excludes certain employer-paid benefits, including payments for sickness or disability insurance plans, medical and hospitalization coverage, and contributions to qualified retirement plans.5Office of the Law Revision Counsel. 26 USC 3306 – Definitions Employer-provided health insurance doesn’t push up your FUTA bill.
The State Credit That Drops the Rate to 0.6%
Employers who pay state unemployment tax (SUTA) on time can claim a credit of up to 5.4% against their FUTA obligation. With the full credit, the effective FUTA rate drops from 6.0% to 0.6%, bringing the maximum per-employee cost down to $42 a year.6Internal Revenue Service. FUTA Credit Reduction Pay your state taxes late or not at all, and you lose the credit and stay stuck with 6.0%.
Credit Reduction States
The 5.4% credit isn’t guaranteed. When a state borrows from the federal unemployment trust fund and doesn’t repay within about two years, the credit shrinks for employers in that state. The reduction is automatic: if a state carries an outstanding loan balance on January 1 for two consecutive years and doesn’t repay by November 10 of the second year, employers there lose part of their credit.7U.S. Department of Labor. FUTA Credit Reductions
For the 2025 tax year (filed in early 2026), California had a 1.2% reduction, so employers there paid an effective FUTA rate of 1.8% instead of 0.6%. The U.S. Virgin Islands had a 4.5% reduction.8Federal Register. Notice of FUTA Credit Reductions Applicable for 2025 The list changes year to year, so check the IRS or Department of Labor announcement each fall.
Calculating What You Owe
For each worker, multiply the first $7,000 of annual wages by your effective FUTA rate. With the full state credit, that rate is 0.6%. An employer with 10 workers who each earn at least $7,000 during the year would owe $7,000 × 0.006 × 10 = $420 for the year.
In a credit reduction state like California for 2025, the same payroll produces a bigger bill: $7,000 × 0.018 × 10 = $1,260. The higher liability also forces quarterly deposits, since the running total will cross the $500 deposit threshold during the year.
How to File and When to Deposit
You report FUTA tax annually on IRS Form 940. The standard filing deadline is January 31 of the year following the tax year, moving to the next business day if it lands on a weekend. Deposit everything on time throughout the year and you get an automatic extension to February 10.9Internal Revenue Service. Instructions for Form 940
The return is annual, but payments are often quarterly. You must deposit FUTA tax by the end of the month following any quarter in which your cumulative undeposited liability exceeds $500. That produces deposit deadlines of April 30, July 31, October 31, and January 31. If your total FUTA liability for the whole year is $500 or less, you can skip quarterly deposits and pay the full amount when you file Form 940. All deposits go through the Electronic Federal Tax Payment System (EFTPS); you cannot mail a check for a quarterly deposit.
Late Deposit Penalties
Missing a deposit deadline triggers a penalty based on how late the payment arrives, and the tiers don’t stack. A deposit that’s 20 days late owes 10%, not 2% plus 5% plus 10%.10Internal Revenue Service. Failure to Deposit Penalty
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5% of the unpaid deposit
- More than 15 days late: 10% of the unpaid deposit
- More than 10 days after the first IRS notice: 15% of the unpaid deposit