FUTA is a federal payroll tax that funds unemployment insurance

FUTA stands for Federal Unemployment Tax Act. It is a payroll tax that your employer pays — not you. The money goes into a federal fund that pays unemployment benefits to workers who lose their jobs. You will see it listed on your pay stub or tax documents as a deduction your employer makes, but it comes from the employer's side of payroll, not your wages.

The tax rate is 6% of the first $7,000 you earn in a calendar year, though employers can claim a credit if they pay state unemployment tax (SUTA) on time. This means most employers actually pay closer to 0.6% in federal FUTA after the state credit. The employer calculates and sends this money to the IRS, separate from income tax withholding.

FUTA has existed since 1935 as part of the Social Security Act. It is one of two unemployment insurance systems — the other is SUTA, which states run. Together, they create the unemployment insurance program that pays benefits when you are laid off or your job ends through no fault of your own.

Key Takeaways

  • FUTA is a federal payroll tax paid by employers, not employees, and funds the federal unemployment insurance system.
  • The tax rate is 6% on the first $7,000 of each employee's annual wages, but employers receive a credit that typically reduces the effective rate to 0.6%.
  • You will not see FUTA deducted from your paycheck — it is a cost to the employer that appears on their tax filings and sometimes on your W-2 for informational purposes.
  • FUTA money pays for unemployment benefits when workers lose jobs, and also funds the Extended Unemployment Compensation program during recessions.

How FUTA connects to unemployment benefits you might receive

When you lose your job and file for unemployment benefits, the money you receive comes from the state unemployment insurance fund, which is fed by SUTA taxes. However, FUTA provides a federal backstop. If a state's unemployment fund runs low, the federal government can loan money to that state from the FUTA fund. During severe recessions, Congress has also used FUTA revenue to fund Extended Unemployment Compensation, which extends benefits beyond the standard 26 weeks most states offer.

The connection matters because it means your employer's FUTA payments are part of the system that protects you if you become unemployed. You do not pay into it directly, but the tax ensures the fund exists when you need it. States also require employers to pay SUTA, which is the primary source of unemployment benefits in most cases.

Who pays FUTA and who does not

Most employers pay FUTA if they meet two conditions: they paid at least $1,500 in wages in any calendar quarter, or they employed at least one person for at least one day in 20 different weeks during the year. If your employer meets either threshold, they owe FUTA on your wages.

Some employers are exempt. Agricultural employers, household employers (people who hire domestic workers), and certain nonprofit organizations do not pay FUTA. State and local government employers also do not pay FUTA, though they may participate in unemployment insurance through other mechanisms. If you work for a very small business that has never paid $1,500 in wages in a quarter, your employer may not owe FUTA, but this is rare.

The difference between FUTA, FICA, and income tax withholding

Your pay stub shows three main categories of deductions: income tax withholding, FICA (Social Security and Medicare), and sometimes FUTA. FUTA is different from all of these. You pay FICA and income tax comes out of your paycheck. FUTA does not — your employer pays it from their own funds. FICA goes to Social Security and Medicare; FUTA goes to unemployment insurance.

Income tax withholding is based on the W-4 you fill out and varies by person. FICA is a fixed 7.65% (6.2% Social Security plus 1.45% Medicare) that comes from your wages, and your employer matches it. FUTA is 6% on the employer's side only, with no employee contribution and no match required from you. The employer reports all three separately to the IRS.

What happens to FUTA money after it is collected

The IRS collects FUTA deposits from employers throughout the year. The money goes into the Unemployment Trust Fund, which is held at the U.S. Treasury. States draw from this fund to pay regular unemployment benefits, and the federal government uses it to make loans to states whose unemployment funds are depleted. During economic downturns, Congress may also appropriate FUTA revenue to extend benefits beyond the standard duration.

The fund is not a savings account that grows year to year. It is designed to cycle: employers pay in, workers draw out when unemployed, and the balance fluctuates with the economy. When unemployment is high, the fund shrinks. When unemployment is low, it rebuilds. States can also borrow from the federal fund if their own state unemployment fund runs dry, and they must repay those loans, usually by paying higher FUTA rates or state taxes.

Why FUTA rates and thresholds change

The 6% FUTA rate and the $7,000 wage base are set by federal law, but they do not change often. Congress last raised the wage base in 1983. However, the effective rate employers pay varies based on their state unemployment tax rate and their individual experience rating. An employer in a state with high unemployment or a history of layoffs may pay a higher state rate, which reduces their FUTA credit and increases their effective federal rate.

Additionally, when states borrow from the federal unemployment fund, the federal government can impose a surtax on employers in those states to encourage repayment. This surtax is temporary and added on top of the regular FUTA rate. It is one reason why FUTA costs can vary by state and year, even though the base rate remains 6%.

Frequently Asked Questions

Will I see FUTA deducted from my paycheck?

No. FUTA is paid entirely by your employer and does not appear as a deduction on your paycheck. You may see it listed on your W-2 form for informational purposes, but it is not money taken from your wages.

Does FUTA apply to all my income?

FUTA applies only to the first $7,000 of your wages in a calendar year. Once you earn $7,000, your employer stops calculating FUTA on additional wages for that year. This is called the wage base. It resets on January 1 each year.

Can I claim FUTA on my taxes?

FUTA is not something individual workers claim on their tax return. It is an employer tax. If you are self-employed, you do not pay FUTA — you pay Self-Employment Tax (SE tax), which funds Social Security and Medicare but not unemployment insurance.

What if my employer does not pay FUTA?

If your employer should be paying FUTA but is not, you can report them to the IRS. However, this does not affect your ability to file for unemployment benefits — your state determines your may be able to access based on your work history and earnings, not on whether your employer paid FUTA correctly.

Does FUTA cover self-employed people?

No. Self-employed workers do not pay FUTA and are generally not covered by unemployment insurance. Some states offer limited unemployment programs for self-employed workers, but these are separate from the FUTA system and vary widely by state.