Federal Unemployment Tax Act (FUTA)

Key Takeaways
* The Federal Unemployment Tax Act (FUTA) imposes a payroll tax on employers to fund federal unemployment programs and state unemployment administration.
* FUTA applies only to employers (not deducted from employee pay). The statutory rate is 6% on the first $7,000 of wages paid to each employee per year.
* Employers that pay state unemployment taxes on time usually qualify for a credit of up to 5.4%, reducing the effective FUTA rate to 0.6%.
* Maximum FUTA per employee (before credits) is $420; with full credit the minimum net per-employee cost is $42.
* Different rules and thresholds apply for businesses, household employers, and agricultural employers; certain employers and payments are exempt.

What is FUTA?
The Federal Unemployment Tax Act (FUTA) requires most employers to pay a federal payroll tax that helps fund unemployment compensation and job-service programs. FUTA taxes are remitted by employers and allocated to state unemployment insurance agencies for benefit payments and program administration.

Rate and Wage Base
* Statutory rate: 6% of FUTA taxable wages.
* Wage base: FUTA applies to the first $7,000 of wages paid to each employee in a calendar year.
* Credit: Employers who pay state unemployment taxes in full and on time typically receive a credit of up to 5.4% of FUTA wages, reducing the effective federal rate to 0.6% (6% − 5.4%).

Calculating FUTA Liability (Example)
1. Determine FUTA-eligible wages per employee (only the first $7,000 counts).
2. Multiply total eligible wages by 6% to compute gross FUTA tax.
3. Subtract any allowable state unemployment tax credit (up to 5.4% of eligible wages).

Example:
Employee A wages subject to FUTA: $7,000 (cap)
Employee B wages subject to FUTA: $5,000
Total eligible wages = $12,000
Gross FUTA = $12,000 × 6% = $720
Possible credit = $12,000 × 5.4% = $648
Net FUTA owed = $720 − $648 = $72

Who Must Pay FUTA
Businesses
An employer generally owes FUTA if, in the current or preceding year, either:
* It paid at least $1,500 in wages in any calendar quarter; or
* It employed at least one person for any part of a day in 20 or more different weeks (full-time, part-time, or temporary).

Household Employers
A household employer (e.g., private home hires such as nannies or housekeepers) must pay FUTA if it pays cash wages of $1,000 or more to a household employee in any calendar quarter. Household employers may report FUTA using Schedule H (Form 1040) or Form 940 in applicable cases.

Agricultural Employers
Farm employers are subject to FUTA if either:
* Cash wages of $20,000 or more were paid in any calendar quarter; or
* Ten or more farmworkers were employed during some part of a day in 20 or more different weeks.

Exempt Employers and Payments
Exempt employers or services include:
* Indian tribal governments (under certain state-participation conditions).
* State or local government services.
* Some tax-exempt organizations (e.g., qualified nonprofit organizations), with exceptions depending on specific activities.

Types of payments excluded from FUTA taxable wages:
* Payments to a spouse, child under age 21, or parent (in many family-work situations).
* Employer contributions to retirement plans, certain fringe benefits, or group-term life insurance (subject to specific rules).

Paying and Reporting FUTA
Deposits
* FUTA can be deposited quarterly or annually depending on liability.
* If an employer’s annual FUTA liability is $500 or more, at least quarterly deposits are required.
* Single quarterly FUTA liabilities under $500 may be carried forward to the next quarter.
* Deposits are made electronically (EFT) in accordance with federal tax deposit rules; due dates generally follow the month after each quarter ends.

Reporting
* Employers report FUTA on IRS Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return).
* Form 940 is filed annually. Filing deadlines and allowed extensions can vary; consult current IRS instructions for exact due dates and rules for employers who made all required deposits.
* Form 940 may be filed electronically or by paper; amended returns are permitted and electronic amendment options are available.

FUTA vs. SUTA (State Unemployment Tax)
* SUTA refers to state unemployment taxes, which vary widely by state in both taxable wage base and rates.
* Paying state unemployment taxes correctly and on time generally entitles employers to the federal FUTA credit (up to 5.4%).
* Employers exempt from state unemployment taxes typically do not qualify for the FUTA credit and may pay the full 6% federal rate.

FUTA vs. FICA
* FUTA: paid only by employers, funds unemployment programs.
* FICA: Federal Insurance Contributions Act taxes are split between employers and employees (and include Social Security and Medicare taxes); those funds finance retirement and health-care benefits, not unemployment insurance.

Key Compliance Notes
* Keep accurate payroll records to track per-employee wages subject to the $7,000 FUTA cap.
* Timely payment of state unemployment taxes is critical to preserve the FUTA credit.
* Check current IRS guidance for deposit schedules, electronic payment requirements, and filing deadlines, as procedures and allowable filing/filing extensions can change.

Bottom Line
FUTA is an employer-paid payroll tax designed to fund unemployment benefits and program administration. Employers should monitor wage caps, understand their state’s SUTA obligations (to secure the FUTA credit), and comply with deposit and Form 940 reporting requirements to avoid penalties and preserve tax credits.