What Is FUTA Tax?

FUTA stands for the Federal Unemployment Tax Act. It is a federal payroll tax that employers must pay to fund unemployment insurance benefits — the payments that eligible workers receive when they lose their jobs through no fault of their own.

FUTA works alongside state unemployment programs. When someone files for unemployment, their benefits are funded through a combination of federal FUTA funds and state SUTA (State Unemployment Tax Act) funds.

Key Facts About FUTA

• Paid only by employers — never deducted from employee wages
• Federal tax — reported to the IRS, not state tax authorities
• Applies to first $7,000 of each employee’s annual wages only
• Gross rate is 6% but most employers pay only 0.6% after credits
• Filed annually on IRS Form 940 by January 31
• Quarterly deposits required when liability exceeds $500

FUTA Tax Rate 2026

There are two FUTA rates you need to know — the gross rate and the net rate after the SUTA credit:

FUTA Wage Base — The $7,000 Limit

FUTA tax only applies to the first $7,000 of each employee’s gross wages during a calendar year. Once an employee’s cumulative wages for the year exceed $7,000, you stop paying FUTA on that employee — for the rest of the year.

This $7,000 federal wage base has not changed in over 40 years. Many states, however, have much higher SUTA wage bases — some as high as $60,000+ per employee.

What Counts as FUTA Taxable Wages?

• Regular salary and hourly wages
• Commissions and bonuses
• Paid time off (PTO, vacation, sick pay)
• Tips reported to the employer
• The cash value of non-cash fringe benefits

What Does NOT Count as FUTA Taxable Wages?

• Employer contributions to health insurance or retirement plans
• Workers’ compensation payments
• Reimbursed business expenses (under an accountable plan)
• Wages paid to independent contractors (1099 workers)
• Wages paid above the $7,000 annual wage base per employee

The 5.4% SUTA Credit — How to Reduce Your FUTA Bill

The biggest FUTA savings opportunity is the 5.4% SUTA credit. Here’s how it works:

If you pay your state unemployment taxes (SUTA) on time and in full, the IRS allows you to credit up to 5.4% against your 6% gross FUTA rate — reducing your net FUTA rate to just 0.6%.

To Qualify for the Full 5.4% Credit You Must:

• Pay SUTA taxes to all states where you have employees
• Pay SUTA by the due date (before filing Form 940)
• Your state must NOT be a “credit reduction state”
• Pay the full SUTA amount owed (no partial payments)

What Is a Credit Reduction State?

Some states borrow money from the federal government when their unemployment funds run low. If a state hasn’t repaid those federal loans after two years, it becomes a credit reduction state. Employers in those states lose part of their 5.4% SUTA credit, increasing their effective FUTA rate.

How to Calculate FUTA Tax — Step by Step

Calculating FUTA tax is straightforward. Follow these four steps for each employee:

Step 1 — Determine Taxable FUTA Wages

Add up the employee’s gross wages for the year. FUTA only applies to the first $7,000. If the employee has earned more than $7,000 this year, their FUTA taxable wages are capped at $7,000.

Step 2 — Apply the Gross FUTA Rate (6%)

Step 3 — Subtract the SUTA Credit (5.4%)

Step 4 — Calculate Net FUTA Tax Owed

Real-World FUTA Calculation Example

Let’s walk through three employees with different salary levels to see exactly how FUTA is calculated in practice.

Employee A — Annual Salary: $35,000

Employee B — Part-Time, Annual Wages: $4,200

Employee C — Credit Reduction State (extra 0.6%)

Calculating FUTA for Multiple Employees

For a business with multiple employees, you calculate FUTA separately for each employee and then total it up. Here’s an example with a small business that has 5 employees:

For employers using ADP payroll, FUTA calculations are handled automatically each payroll run. You can use our ADP Salary Calculator to quickly estimate payroll tax costs per employee.

FUTA vs SUTA — What’s the Difference?

FUTA and SUTA both fund unemployment benefits, but they operate at different levels with different rules:

Who Is Exempt from FUTA Tax?

Not all workers or employers are subject to FUTA. Here are the main exemptions:

Exempt Employers

• Religious organizations — churches and religious non-profits are generally exempt
• Government employers — federal, state, and local government entities
• Household employers with less than $1,000 in cash wages per quarter
• Agricultural employers with fewer than 10 employees and less than $20,000 in quarterly wages

Exempt Payments / Workers

• Independent contractors (1099 workers) — not employees, not subject to FUTA
• Wages paid to a spouse, child under 21, or parent — exempt in sole proprietorships
• Wages above $7,000 per employee per year
• Certain employer-paid benefits — health insurance, retirement plan contributions, expense reimbursements

Filing Form 940 — The FUTA Annual Return

Every employer subject to FUTA must file IRS Form 940 — the Employer’s Annual Federal Unemployment (FUTA) Tax Return — once a year.

Form 940 Key Details

What Form 940 Covers

• Total FUTA taxable wages paid during the year
• SUTA credits claimed
• Credit reduction amounts (if applicable)
• Total FUTA tax liability and deposits made
• Any balance due or overpayment

FUTA Tax Deposit Rules — When to Pay

FUTA taxes are deposited quarterly — but only when your cumulative FUTA liability exceeds $500 in a quarter. Here’s how it works:

The $500 Deposit Threshold Rule

• If FUTA liability in a quarter is $500 or less — carry it forward to the next quarter
• If FUTA liability exceeds $500 in any quarter — deposit it by the quarter’s due date
• If total annual FUTA is $500 or less — pay it when you file Form 940 (no deposit required)
• All deposits must be made using the Electronic Federal Tax Payment System (EFTPS)

FUTA Tax 2026 — Quick Reference Summary

FUTA Tax FAQs