FUI tax is the informal name for FUTA — the Federal Unemployment Tax Act payroll tax. Only employers pay it. The statutory rate is 6% on the first $7,000 of wages you pay each employee during the calendar year, but most employers pay an effective rate of 0.6% after claiming a credit for the state unemployment taxes they already pay. FUTA revenue funds the administration of unemployment insurance; actual unemployment benefits come from state programs.
The Rate and the $7,000 Wage Base
The FUTA tax rate is 6%, applied to the first $7,000 in wages you pay each employee during the calendar year.1Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax That $7,000 cap is called the taxable wage base and is set by statute.2Office of the Law Revision Counsel. 26 USC 3306 – Definitions Once an employee’s earnings for the year cross $7,000, you owe no more FUTA on any additional wages you pay that person.
Unlike Social Security and Medicare, FUTA is entirely on the employer. Nothing is withheld from workers’ paychecks.
Which Employers Owe FUTA
You generally owe FUTA if you meet either of these tests in the current or preceding calendar year:2Office of the Law Revision Counsel. 26 USC 3306 – Definitions
- You paid $1,500 or more in total wages during any single calendar quarter, or
- You had at least one employee for any part of a day in 20 or more different weeks. The weeks do not need to be consecutive, and different workers can count in different weeks.
Meeting either threshold in either year makes you a FUTA-liable employer. Once triggered, you must track payroll and report to the IRS even if your workforce shrinks later.
Household Employers
If you hire someone for domestic work in your private home — a nanny, housekeeper, or home health aide, for example — a separate threshold applies. You owe FUTA only if you pay total cash wages of $1,000 or more to household employees in any calendar quarter of the current or preceding year. Wages you pay to your spouse, your child under 21, or your parent do not count and are not subject to FUTA.3Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Farm Employers
Agricultural employers face a higher bar. You owe FUTA on farmworker wages only if you paid $20,000 or more in cash wages to farmworkers in any calendar quarter, or if you employed 10 or more farmworkers for some part of a day in 20 or more different weeks during the year.4Employment and Training Administration. Unemployment Insurance Tax Topic
Who Is Exempt
501(c)(3) Organizations
Charities, religious organizations, educational institutions, and other groups exempt from income tax under section 501(c)(3) are exempt from FUTA entirely.5Internal Revenue Service. Employer’s Supplemental Tax Guide Other types of tax-exempt organizations (those under a different subsection of 501) are generally not exempt from FUTA, though wages under $50 in a quarter for those organizations are excluded.
Certain Family Employment
Services performed by a child under 21 working for a parent, or by a spouse or parent working for their family member, are not covered employment for FUTA.2Office of the Law Revision Counsel. 26 USC 3306 – Definitions This applies when the family member is the actual employer, which generally means sole proprietorships and certain partnerships. If the business is incorporated, the corporation is the employer, and the exemption typically does not apply.
Independent Contractors
FUTA applies only to employees, not independent contractors. The IRS looks at three categories to distinguish the two: behavioral control (whether you direct how the work is done), financial control (payment method, expense reimbursement, tools), and the nature of the relationship (benefits, a written contract, an ongoing arrangement).6Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? No single factor is decisive.
Misclassifying an employee as a contractor can result in back taxes, interest, and penalties, including retroactive FUTA liability on wages that should have been covered.7Taxpayer Advocate Service. Employee or Independent Contractor, What Are the Tax Implications
Why Most Employers Pay 0.6%, Not 6%
Federal law lets you credit contributions to your state’s unemployment fund against your FUTA bill, up to 5.4% of taxable wages.8Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax The credit cannot exceed 90% of the 6% federal tax, which is how the 5.4% ceiling is calculated.
Pay your state unemployment taxes in full and on time, and your effective FUTA rate drops to 0.6%. On a $7,000 wage base, that is $42 per employee per year. To get the full credit, state contributions must be paid by the due date for Form 940, generally January 31 of the following year. Pay state taxes late and the credit drops to 90% of what you would otherwise have received.
State unemployment taxable wage bases vary widely, from $7,000 up to more than $78,000 depending on the state. The FUTA credit calculation only counts the portion of state tax attributable to the first $7,000 in wages per employee.
Credit Reduction States
Sometimes a state borrows from the federal government to cover unemployment shortfalls. If a state carries an outstanding loan balance on January 1 for two consecutive years and does not repay it by November 10 of the second year, employers in that state lose part of the 5.4% credit.9Internal Revenue Service. FUTA Credit Reduction 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 further reductions possible beginning in the third and fifth years if certain conditions are not met.
For tax year 2025, California faced a credit reduction of 1.2% and the U.S. Virgin Islands faced a reduction of 4.5%.10Federal Register. Notice of FUTA Credit Reductions Applicable for 2025 California employers, for example, could claim only a 4.2% credit instead of 5.4%, pushing their effective FUTA rate to 1.8% per employee. The 2026 list will not be finalized until after November 10, 2026. If you operate in a credit reduction state, you must file Schedule A (Form 940) to calculate the additional tax.11Internal Revenue Service. Schedule A (Form 940)
Payments That Don’t Count as FUTA Wages
Not every dollar you pay an employee is FUTA-taxable. Common exempt payments include:12Internal Revenue Service. Instructions for Form 940
- Certain fringe benefits, including the value of some meals and lodging, contributions to health plans and health savings accounts, and payments under cafeteria plans.
- The cost of employer-provided group-term life insurance, including the imputed income on coverage above $50,000. It is exempt from FUTA even though the excess is subject to Social Security and Medicare.
- Employer contributions to qualified retirement plans, SIMPLE retirement accounts (other than elective salary reductions), and 401(k) plans.
- Dependent care assistance up to $5,000 per employee ($2,500 if married filing separately) for qualifying care that allows the employee to work.
Report a payment as exempt on Form 940 only if you already included it in your total payments on the form.
Filing Form 940
Form 940 is the annual return you use to report FUTA liability for the calendar year.13Internal Revenue Service. About Form 940 It is generally due January 31 of the following year. When January 31 falls on a weekend or holiday, the deadline shifts to the next business day. If you deposited all your FUTA tax on time throughout the year, you get an automatic extension to February 10.12Internal Revenue Service. Instructions for Form 940
The form works through a simple calculation. Start with total wages paid to all employees, subtract exempt payments, then subtract wages above the $7,000 per-employee cap. Multiply the result — your taxable FUTA wages — by 0.006, or a higher rate if you are in a credit reduction state or paid state unemployment taxes late. Subtract any deposits you already made during the year to find your remaining balance.
You can file electronically through IRS e-file for faster processing, or file on paper (the mailing address depends on your location and whether you are including a payment). Certified professional employer organizations are generally required to file electronically.
Quarterly Deposits and Late Penalties
Form 940 is annual, but FUTA deposits are due quarterly whenever your cumulative liability exceeds $500. If your FUTA liability for a quarter, including any amount carried forward, is $500 or less, you carry it into the next quarter. Once the running total crosses $500, you must deposit by the last day of the month after that quarter ends.14Internal Revenue Service. Topic No. 759, Form 940 Filing and Deposit Requirements So if your liability first exceeds $500 in the second quarter, the deposit is due by July 31.
Federal tax deposits must be made electronically, through your IRS business tax account, IRS Direct Pay for businesses, or the Electronic Federal Tax Payment System (EFTPS).15Internal Revenue Service. Depositing and Reporting Employment Taxes If your total liability for the year stays at $500 or less, you can pay the full amount when you file Form 940.
Late deposits trigger a failure-to-deposit penalty that grows with the delay:16Internal Revenue Service. Failure to Deposit Penalty
- 1–5 calendar days late: 2% of the unpaid deposit.
- 6–15 calendar days late: 5%.
- More than 15 calendar days late: 10%.
- More than 10 days after an IRS notice demanding payment: 15%.
The tiers do not stack. If your deposit is 15 days late, you owe 10%, not 2% plus 5% plus 10%.
If You Bought the Business
Buy substantially all of another business’s assets and immediately keep on people who worked for the prior owner, and the IRS treats you as a successor employer for FUTA. You can count wages the previous owner already paid to those continuing employees toward the $7,000 per-person cap, which can reduce your FUTA liability for the rest of the year.12Internal Revenue Service. Instructions for Form 940 If the prior owner paid an employee $5,000 before the sale and you pay another $3,000 after, only $2,000 of your payment is FUTA-taxable, because the combined total already crosses $7,000. Both the predecessor and the successor file their own Form 940 for the year.