Employers pay FUTA tax. The Federal Unemployment Tax Act puts the entire cost of federal unemployment insurance on the business, not the worker, and nothing is withheld from an employee’s paycheck to cover it. The statutory rate is 6.0% on the first $7,000 of wages paid to each employee per year, though most employers end up at an effective rate of 0.6% once a credit for state unemployment taxes is applied.
Because FUTA is an employer-only tax, the practical question is not who the money comes out of, but which businesses cross the threshold into owing it and which are carved out. Both answers sit in the statute.
When a Business Becomes Liable
Federal law sets two tests for general (non-household, non-agricultural) employers. A business owes FUTA tax if, during the current or preceding calendar year, it meets either one:
- It paid wages of $1,500 or more in any calendar quarter, or
- It employed at least one person for some part of a day in 20 or more different calendar weeks. The weeks do not need to be consecutive.
Once either threshold is crossed, the employer owes FUTA on wages paid to all employees for that year, not just on the wages or the quarter that triggered liability.1Office of the Law Revision Counsel. 26 USC 3306 – Definitions
Household Employers
People who hire nannies, housekeepers, or other domestic workers follow a different rule. A household employer becomes liable once they pay cash wages of $1,000 or more in any calendar quarter to all household employees combined.1Office of the Law Revision Counsel. 26 USC 3306 – Definitions
Agricultural Employers
Farm employers owe FUTA if they paid cash wages of $20,000 or more to farmworkers in any calendar quarter, or if they employed 10 or more farmworkers for some part of a day in 20 different calendar weeks.1Office of the Law Revision Counsel. 26 USC 3306 – Definitions
The Employer Pays the Whole Thing
Social Security and Medicare taxes are split between employer and employee. FUTA is not. You never withhold FUTA from a paycheck, and the full liability comes from the business’s own funds.
Who Doesn’t Owe FUTA
Whole categories of employers and workers sit outside the FUTA system. Knowing where the edges are can spare a business from filing on wages that were never taxable in the first place.
Tax-Exempt and Government Employers
Organizations described in Section 501(c)(3) of the Internal Revenue Code, including religious organizations, charities, and educational institutions, do not owe FUTA tax on wages paid to their employees.2Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption Federal, state, and local government employers are also exempt, as are Indian tribal governments.3Office of the Law Revision Counsel. 26 USC 3306 – Definitions
Family Employees
Family employment gets special treatment, but only when the business is unincorporated. In a sole proprietorship, or in a partnership where both partners are the child’s parents, wages paid to a child under 21 are not subject to FUTA. Wages paid to a parent working for their child’s sole proprietorship are also exempt, regardless of the type of work.4Internal Revenue Service. Family Employees
These exemptions generally do not apply when the business is a corporation or an estate. In those cases, standard FUTA rules apply regardless of the family relationship.4Internal Revenue Service. Family Employees
Independent Contractors
FUTA applies only to employees. If you pay an independent contractor for services, you generally do not owe FUTA tax, Social Security and Medicare taxes, or income tax withholding on those payments.5Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? The distinction turns on the degree of control the business exercises over how the work is done, not on what a contract calls the worker. Misclassifying an employee as a contractor does not remove the FUTA liability; it only hides it.
Exempt Compensation
Even inside a liable business, some payments never count as FUTA wages. Employer contributions to accident or health plans, including medical, dental, and long-term care insurance, are excluded. So is the cost of group-term life insurance you provide, even above $50,000 of coverage, and any amounts you pay to maintain COBRA continuation coverage. IRS Publication 15-B lists each fringe benefit and its FUTA treatment in full.6Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits
What the Employer Actually Pays
FUTA tax applies only to the first $7,000 you pay each employee in a calendar year. Once a worker’s cumulative wages pass that figure, you stop owing FUTA on their pay for the rest of the year.7Internal Revenue Service. Topic No. 759, Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements The $7,000 wage base has been at that level since 1983 and is not adjusted for inflation.
Most cash compensation counts toward the base: hourly pay, salary, commissions, bonuses, sick pay, and paid vacation. A worker who earns more than $7,000 early in the year uses up your FUTA obligation for them at that point.
The Rate and the State Credit
The statutory FUTA rate is 6.0% of taxable wages.8Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax Very few employers pay that full rate. Employers who pay their state unemployment taxes in full and on time can claim a credit of up to 5.4% against their federal liability, bringing the effective rate down to 0.6%.9Internal Revenue Service. FUTA Credit Reduction At 0.6% of a $7,000 wage base, the maximum FUTA cost per employee is $42 per year.
To claim the full credit, state unemployment contributions must be paid by the Form 940 due date. If those state payments are late, the credit drops to 90% of what it would have been.10Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax
Credit Reduction States
The 5.4% credit shrinks in states that have borrowed from the federal government to pay unemployment benefits and failed to repay the loan within two years. Employers in those states lose part of their credit. The reduction starts at 0.3% in the first year and grows by another 0.3% for each additional year the loan remains outstanding, so a 0.3% reduction pushes the effective FUTA rate from 0.6% up to 0.9%.9Internal Revenue Service. FUTA Credit Reduction
For the 2025 tax year, California had a credit reduction of 1.2%, so employers there paid an effective FUTA rate of 2.4% (the base 0.6% plus the 1.2% reduction), or $168 per employee rather than $42. The U.S. Virgin Islands had a credit reduction of 4.5%.11Federal Register. Notice of the Federal Unemployment Tax Act (FUTA) Credit Reductions Applicable for 2025 Operating in a credit reduction state means filing Schedule A with Form 940 to calculate the extra tax.
FUTA Is Separate From State Unemployment Tax
Paying FUTA does not satisfy state unemployment tax (SUTA), and the two systems use different wage bases. State wage bases run from $7,000 up to more than $70,000 depending on the state, so an employer can be finished with FUTA for a given worker and still owe substantial state unemployment tax on that same worker’s wages for the rest of the year. The federal credit only works because employers pay both.