What Is the Federal Unemployment Tax Rate and Who Pays It?

The federal unemployment tax rate is 6.0% on the first $7,000 of wages you pay each employee during a calendar year. Most employers don’t actually pay 6.0%. A credit of up to 5.4% applies when you pay your state unemployment taxes on time, dropping the effective federal rate to 0.6% — about $42 per employee per year. FUTA is entirely an employer tax; you never withhold it from an employee’s paycheck.

The 6.0% Rate and the $7,000 Wage Base

Federal law sets the FUTA tax at 6.0% of taxable wages.¹ The taxable wage base is $7,000 per employee per year.² Once a worker’s cumulative wages for the year cross that threshold, you owe no more FUTA on that worker for the rest of the year.

Unlike Social Security and Medicare, FUTA is not split with the employee. You pay the whole thing, and deducting it from a paycheck can create liability for improper withholding. The revenue funds the administration of state unemployment insurance programs, pays half the cost of extended benefits during high-unemployment periods, and maintains a loan fund states can borrow from when their own accounts run low.³

Why Most Employers Pay 0.6%

Employers who pay their state unemployment taxes on time qualify for a credit of up to 5.4% against the 6.0% federal rate.⁴ With the full credit your effective rate is 0.6%, which on a $7,000 base comes to $42 per employee per year.⁵

Timing decides whether you get the full credit. You have to pay your state unemployment taxes by the due date for Form 940, January 31 of the following year. Pay your state taxes after that deadline and your credit is capped at 90% of what it would otherwise have been, which raises the amount you owe the federal government.⁴

The state side is a separate calculation. State unemployment taxable wage bases run roughly from $7,000 to more than $70,000 depending on the state, and your state liability has nothing to do with what you owe on Form 940 beyond triggering the credit.

Credit Reduction States Pay More

A state becomes a “credit reduction state” when it borrows from the federal unemployment trust fund and fails to repay on schedule. If a state has an outstanding loan balance on January 1 for two consecutive years and does not fully repay by November 10 of the second year, the FUTA credit for employers in that state is reduced.⁵

The reduction stacks:

First year: credit drops 0.3%, so the effective rate is 0.9%
Second year: another 0.3% off, effective rate 1.2%
Each following year: another 0.3% until the state repays in full

Additional reductions beyond the 0.3% annual step can apply beginning in the third and fifth years if the loan remains outstanding and certain conditions are not met.⁵ The Department of Labor announces credit reduction states after the November 10 deadline each year, and the IRS publishes the applicable rates in the Instructions for Schedule A (Form 940). Employers with wages in more than one state, or in any credit reduction state, must file Schedule A with the annual return and list FUTA taxable wages by state.

Who Actually Owes FUTA

Most active employers owe FUTA. You become liable if you meet either of two tests:

You paid wages of $1,500 or more in any calendar quarter during the current or preceding year, or
You had at least one employee for some part of a day in 20 or more different weeks during the current or preceding year. The weeks don’t have to be consecutive and it doesn’t have to be the same employee.⁶

Two categories of employers have their own thresholds. Household employers who hire domestic workers such as nannies or housekeepers owe FUTA if they paid $1,000 or more in cash wages in any calendar quarter. Agricultural employers owe FUTA if they paid $20,000 or more in cash wages in any quarter, or employed 10 or more farmworkers for some part of the day in 20 different calendar weeks.²

Workers and Employers That Don’t Trigger FUTA

FUTA applies only to wages paid to employees, so payments to independent contractors don’t count. The IRS looks at behavioral control, financial control, and the type of relationship to decide whether a worker is an employee or a contractor, and misclassifying employees as contractors can produce liability for unpaid FUTA plus penalties and interest.⁷

Certain family wages are also exempt. If you run a sole proprietorship, or a partnership in which every partner is a parent of the worker, wages you pay your child under age 21 are not subject to FUTA. That exemption doesn’t apply if your business is a corporation or a partnership with non-parent partners. Wages paid to your spouse, or by an adult child to a parent working for them, are also exempt from FUTA, though other employment taxes still apply.⁸⁹

Section 501(c)(3) organizations — religious, charitable, and educational — are exempt from FUTA on wages they pay employees.¹⁰ Federal, state, and local government employers are also generally exempt.

Paying and Filing: Form 940 and Deposits

You report annual FUTA on IRS Form 940, due January 31 of the year after the tax year. The return is annual, but deposits can be quarterly depending on how much you owe.¹¹

The deposit rule is built around a $500 threshold:

If your FUTA liability is more than $500 at the end of any quarter, deposit the full amount by the last day of the month after that quarter (April 30, July 31, October 31, or January 31)
If your liability is $500 or less at quarter’s end, carry it forward to the next quarter
If your total liability at the end of the fourth quarter, including any carryover, is $500 or less, you can pay it with Form 940 by January 31

All FUTA deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS).¹² Missing a deposit deadline triggers a tiered penalty: 2% if the deposit is 1 to 5 days late, 5% for 6 to 15 days, 10% beyond 15 days, and 15% if the deposit remains unpaid more than 10 days after an IRS notice demanding payment.¹³

1
Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax
2
Office of the Law Revision Counsel. 26 USC 3306 – Definitions
3
U.S. Department of Labor. Unemployment Insurance Tax Topic
4
Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax
5
Internal Revenue Service. FUTA Credit Reduction
6
Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
7
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
8
Internal Revenue Service. Family Employees
9
Internal Revenue Service. Tax Treatment for Family Members Working in the Family Business
10
Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption
11
Internal Revenue Service. About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
12
Internal Revenue Service. Employment Tax Due Dates
13
Internal Revenue Service. Failure to Deposit Penalty