Who Pays FUTA Tax: Employers or Employees?

Employers pay FUTA tax. The federal unemployment tax is imposed entirely on the employer, and unlike Social Security and Medicare taxes, no portion of it may be withheld from an employee’s paycheck.¹ The statutory rate is 6.0% on the first $7,000 of wages paid to each worker per year, though most employers pay an effective rate of just 0.6% after a credit for state unemployment taxes.²

The money funds the federal-state unemployment insurance system. Employees never see FUTA on their pay stubs because it is not their tax. If any FUTA is withheld from a worker’s wages, that is not compliance; it is a payroll error.

When a Business Becomes Responsible for FUTA

Federal law treats a business as a FUTA employer once it meets either of two tests during the current or preceding calendar year.³ Meeting one is enough:

You paid $1,500 or more in total wages to employees during any single calendar quarter, counting gross pay, commissions, and bonuses before deductions.
You had at least one employee working for any part of a day during 20 or more weeks in the year, with each of those days falling in a different calendar week. The weeks need not be consecutive, and the worker need not be full-time.

Once either threshold is crossed, the employer must file Form 940 and pay FUTA tax for that year. The obligation also carries forward: if the test was met in the preceding year, the business remains liable for the current year even if payroll drops back down.³

Household and Agricultural Employers

Domestic services and farm labor sit outside the general tests above and have their own thresholds.

Household Employers

If you employ someone in your home, such as a nanny, housekeeper, or private cook, you owe FUTA once you pay total cash wages of $1,000 or more in any calendar quarter. The taxable base is the first $7,000 in cash wages paid to each household employee during the year.⁴

Agricultural Employers

Farm operators face a higher bar. FUTA liability begins when either standard is met in the current or preceding calendar year:⁵

Cash wages of $20,000 or more paid to farmworkers in any calendar quarter.
10 or more farmworkers employed for some part of a day in at least 20 different weeks, with each day in a separate calendar week.⁶

Employers and Workers Outside FUTA

Several categories of employer, and several kinds of working relationship, fall outside FUTA entirely. Knowing where the tax does not reach matters as much as knowing where it does.

Tax-Exempt Organizations

Organizations with 501(c)(3) status, including religious institutions, charities, and educational organizations, do not pay FUTA on their employees’ wages.⁵ They still participate in unemployment insurance through state programs, typically by reimbursing the state directly for any benefits their former employees receive.

Government Employers

Services performed for a state government, local government, or their wholly owned agencies are excluded from FUTA.³ Coverage comes through state programs rather than the federal tax.

Indian Tribal Governments

Federally recognized tribes are generally exempt from FUTA, provided the tribe participates in its state’s unemployment insurance system by making tax contributions or reimbursing the state for claims. The election can be made entity by entity, so one tribal enterprise may participate while another does not. Private businesses on tribal land do not qualify for the exemption.⁷

Family Employment

Certain family relationships fall outside FUTA when the business is a sole proprietorship or a partnership in which each partner is a family member. Work performed by a spouse, a parent, or a child under 21 employed by their parent is not covered.⁵ The exclusion does not extend to corporations, even family-owned ones.

Independent Contractors and Statutory Nonemployees

FUTA applies only to wages paid to employees. Payments to an independent contractor who receives a Form 1099-NEC are not subject to FUTA. Misclassifying an employee as a contractor to avoid the tax can lead to back taxes, penalties, and interest.

Two groups, licensed real estate agents and direct sellers, are treated as self-employed for all federal tax purposes as long as their pay is based on sales output rather than hours and they have a written contract stating they will not be treated as employees.⁸ Businesses that engage them under qualifying agreements owe no FUTA on that compensation.

What the Employer Actually Pays

The 6.0% statutory rate applies only to the first $7,000 of each employee’s wages in a calendar year.² That cap, the federal wage base, has not changed in decades. Once a worker’s year-to-date pay passes $7,000, no further FUTA is owed on that worker for the rest of the year.

Most employers do not pay 6.0%. Paying state unemployment tax on time earns a credit of up to 5.4%, dropping the effective FUTA rate to 0.6%.⁹ At that rate, the maximum FUTA cost per employee is $42 per year. Employers who fall behind on state unemployment tax can lose part or all of the credit.

Not every dollar of compensation counts toward the $7,000 base. Certain fringe benefits are excluded from FUTA wages entirely, including employer contributions to health insurance and HSAs, group-term life insurance up to $50,000 per employee, qualified transportation and parking benefits, educational assistance up to $5,250 per year, dependent care assistance up to $7,500 per year, and de minimis benefits such as occasional snacks.¹⁰ Subtract these from each employee’s total compensation before deciding whether wages have crossed the $7,000 line.

When the Employer’s Rate Goes Up: Credit Reductions

The 5.4% credit is not automatic in every state. When a state’s unemployment trust fund runs short, it can borrow from the federal government under Title XII of the Social Security Act. If the state carries an outstanding loan balance on January 1 for two or more consecutive years and does not repay in full by November 10 of the second year, employers in that state lose part of their credit.¹¹

The reduction starts at 0.3% for the first year and grows by another 0.3% each additional year the loan is unpaid. An employer in a state with a 0.3% reduction receives a 5.1% credit rather than 5.4%, pushing the effective FUTA rate from 0.6% to 0.9%. Further add-on reductions can begin in the third and fifth years if certain conditions are not met.¹²

For 2025, California employers faced a 1.2% credit reduction and employers in the U.S. Virgin Islands faced a 4.5% reduction. Connecticut and New York had been subject to potential reductions but repaid before the November 10 deadline.¹³ The final list changes every year and is not settled until November 10, so check the IRS credit reduction page before filing Form 940.

State unemployment wage bases are separate from the federal $7,000 base and vary widely, ranging from $7,000 to over $70,000. New employers usually receive a default state rate for one to three years before earning an experience-based rate. Whatever the state numbers look like, the federal side of the bill stays with the employer, and the employee’s paycheck stays untouched by FUTA.

1
Cornell Law Institute. Federal Unemployment Tax Act (FUTA)
2
Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax
3
Office of the Law Revision Counsel. 26 USC 3306 – Definitions
4
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
5
Office of the Law Revision Counsel. 26 USC 3306 – Definitions
6
Employment and Training Administration – U.S. Department of Labor. Unemployment Insurance Tax Topic
7
Internal Revenue Service. Federal Unemployment Tax (FUTA) Exception for Tribes
8
Internal Revenue Service. Statutory Nonemployees
9
Internal Revenue Service. Instructions for Form 940 (2025)
10
Internal Revenue Service. Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits
11
Internal Revenue Service. FUTA Credit Reduction
12
Employment and Training Administration – U.S. Department of Labor. FUTA Credit Reductions
13
Federal Register. Notice of the Federal Unemployment Tax Act (FUTA) Credit Reductions Applicable for 2025