FUTA is the 6% federal employer-only tax on the first $7,000 of each employee's wages annually, funding federal unemployment benefit administration. Most employers pay an effective net rate of 0.6% after the state UI tax credit.
The Federal Unemployment Tax Act (FUTA) requires employers to pay 6% on the first $7,000 of each employee's wages per year — capped at $420 per employee annually at the gross rate. FUTA is an employer-only tax; employees do not pay it or have it withheld. The effective FUTA rate is typically much lower than 6%. Employers who pay state unemployment insurance (UI) taxes in full and on time receive a federal credit of up to 5.4%, reducing the net FUTA rate to 0.6% — capped at $42 per employee per year. This credit is the normal case for compliant employers in states with solvent UI trust funds. Some states have FUTA 'credit reduction' status — states that borrowed from the federal unemployment trust fund and haven't repaid receive reduced credits, meaning employers in those states pay higher effective FUTA rates. The DOL publishes annual credit reduction state lists at https://www.dol.gov/agencies/eta/unemployment-insurance-payment-accuracy/futa-credit-reduction. In recent years, California and New York have intermittently appeared on the credit reduction list. FUTA and SUTA (State Unemployment Tax) are separate but interconnected. SUTA rates vary by state and are experience-rated — employers with more unemployment claims pay higher SUTA rates. Total employer unemployment tax burden (FUTA + SUTA) is typically 2–5% of payroll, heavily weighted toward SUTA. FUTA is reported and paid annually on Form 940 (due January 31), with quarterly deposits required when liability exceeds $500. The IRS provides full FUTA filing instructions in the Form 940 guide (https://www.irs.gov/forms-pubs/about-form-940). The Department of Labor administers the FUTA credit reduction program and publishes affected-state lists annually (https://www.dol.gov/agencies/eta/unemployment-insurance-payment-accuracy/futa-credit-reduction).
Employer only. FUTA is not withheld from employees' paychecks. Employees pay FICA (Social Security + Medicare) but not FUTA. The employer bears the full FUTA liability.
Gross rate: 6% on first $7,000 of each employee's wages = $420 maximum per employee. After the 5.4% state UI credit, the net effective rate for most employers is 0.6% = $42 per employee per year. Credit reduction states have higher effective rates.
Annual return on Form 940, due January 31. Quarterly deposits required if FUTA liability exceeds $500 in any quarter — deposit by the last day of the month following the quarter. If annual liability is $500 or less, pay with the Form 940 filing.
Yes. FUTA is the federal layer; SUTA (State Unemployment Tax, also called SUI) is the state layer. Both are employer-only taxes. SUTA rates vary by state and are experience-rated. FUTA is filed on Form 940; SUTA is filed on state-specific forms with state tax agencies.