The federal unemployment tax rate is 6% on the first $7,000 of each employee's annual wages

The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax on employee wages. The base rate is 6%, applied to the first $7,000 of wages each employee earns in a calendar year. That means the maximum FUTA tax per employee is $420 annually ($7,000 × 0.06). Once an employee reaches $7,000 in wages, no additional federal unemployment tax is owed on their earnings for the rest of that year.

Most employers can claim a credit against their FUTA tax if they pay state unemployment insurance (SUI) taxes on time. This credit can reduce the effective federal rate to 0.6% for employers in states with approved unemployment programs. The credit is capped at 5.4% of taxable wages, which is why the effective rate rarely goes below 0.6%.

FUTA tax is separate from state unemployment taxes and from Social Security and Medicare taxes (FICA). Employers file FUTA taxes annually on Form 940, due by January 31 of the following year. Some employers with high unemployment claims history may face a higher FUTA rate, though this is less common.

Key Takeaways

  • Federal unemployment tax is 6% on the first $7,000 of each employee's wages per year, capping out at $420 per employee.
  • Most employers reduce their federal rate to 0.6% by paying state unemployment insurance taxes on time and claiming the credit.
  • The $7,000 wage base resets every January 1, so new employees and returning workers start fresh each year.
  • FUTA is filed once yearly on Form 940, due January 31, and is separate from state unemployment taxes and payroll withholding.
  • Employers in states with unpaid unemployment debts to the federal government may face a higher FUTA rate temporarily.

How the credit against FUTA actually works

The credit system is how most employers end up paying 0.6% instead of 6%. When you pay your state unemployment insurance tax on time and in full, you can claim a credit of up to 5.4% against your federal FUTA liability. This brings your effective federal rate down from 6% to 0.6%.

The credit is not automatic — you claim it on Form 940 when you file. If you pay your state tax late or incompletely, you lose part or all of the credit. If your state has borrowed money from the federal government to pay unemployment benefits and has not repaid it, the credit may be reduced further, raising your effective FUTA rate above 0.6%.

Some employers in states with federal loan balances see a temporary surcharge added to their FUTA rate. This surcharge phases out as the state repays the federal loan. You can check your state's loan status through the U.S. Department of Labor website.

The $7,000 wage base and how it applies

The $7,000 threshold is per employee, per calendar year. It does not carry over from year to year. On January 1, every employee's wage counter resets to zero, and FUTA tax begins accruing again on their first dollar of 2025 wages.

If an employee earns $7,000 by June and then earns another $5,000 by December, you owe FUTA tax only on the first $7,000. The additional $5,000 is not subject to federal unemployment tax. If that employee leaves and you hire a replacement who earns $3,000 before year-end, you owe FUTA tax on that $3,000 as well — the wage base does not combine across employees.

Wages include salary, hourly pay, bonuses, and commissions. Some payments — like certain fringe benefits or payments to family members in a sole proprietorship — may be excluded, but most ordinary compensation counts toward the $7,000 base.

Who pays FUTA and who does not

Most employers with employees must pay FUTA tax. The main exceptions are sole proprietors with no employees, partnerships where all partners are owners, and S-corporations where the owner is the only employee. Agricultural employers, household employers, and nonprofit organizations have different rules and thresholds.

If you paid $1,500 or more in wages in any quarter of the current or prior year, you are required to pay FUTA tax. Some states have lower thresholds for state unemployment tax, so you may owe state tax even if you fall below the federal threshold.

Household employers (those who hire nannies, housekeepers, or yard workers) have a separate threshold: $1,000 in wages in any quarter triggers FUTA liability. Agricultural employers face a $20,000 threshold or 10 or more employees in any 20 weeks.

When FUTA is due and how to file

FUTA is filed once per year on Form 940, due by January 31 of the following year. You do not pay FUTA with each paycheck the way you do with income tax withholding. Instead, you calculate your total FUTA liability for the year and pay it in one lump sum by the January 31 deadline.

Some employers with large FUTA liabilities are required to make quarterly deposits instead. If you expect to owe more than $500 in FUTA tax for the year, you must deposit it quarterly using the Electronic Federal Tax Payment System (EFTPS). Quarterly deposits are due by the end of the month following the end of each quarter.

Form 940 asks for your total wages paid, the amount subject to FUTA tax, your state unemployment tax payments, and the credit you are claiming. You will need payroll records showing wages by employee and state. If you use a payroll service, they typically handle FUTA calculation and filing for you.

State unemployment tax and how it relates to FUTA

State unemployment insurance (SUI) tax is separate from FUTA but closely linked. You pay both to fund unemployment benefits — FUTA funds the federal portion and state administration, while SUI funds state benefits. State rates vary widely, from around 0.5% to 5.4% or higher, depending on your industry and your company's unemployment claims history.

The federal credit system ties them together: paying your state tax on time and in full reduces your federal FUTA rate from 6% to 0.6%. If you fail to pay state tax, you lose the credit and owe the full 6% federal rate, even if you later pay the state amount.

Some employers face a higher state rate if they have many former employees drawing unemployment benefits. This is called "experience rating" or "merit rating." A higher state rate does not automatically raise your FUTA rate, but it does increase your total unemployment tax burden.

Frequently Asked Questions

Do employees pay FUTA tax?

No. FUTA is an employer-only tax. Employees do not see it deducted from their paychecks. Employees do pay state unemployment insurance taxes in a few states (New Jersey, Pennsylvania, and Alaska), but those are separate from FUTA.

What happens if I do not pay FUTA on time?

The IRS charges interest and penalties on unpaid FUTA tax. Penalties typically start at 5% of the unpaid amount and increase the longer the debt remains outstanding. If you owe FUTA tax, contact the IRS or a tax professional to set up a payment plan rather than ignoring the bill.

Can the FUTA wage base change?

Yes, Congress can raise or lower the $7,000 wage base, though it has remained at $7,000 since 1983. If it changes, the new base applies to wages earned in the year of the change. You would see the new amount on Form 940 instructions for that year.

Do I owe FUTA tax on contractor payments?

No. Independent contractors are not employees, so you do not owe FUTA tax on payments to them. You report contractor payments on Form 1099-NEC instead. The IRS has specific rules for determining whether someone is an employee or contractor, so misclassification can result in back taxes and penalties.

What if my state has a federal loan balance?

If your state borrowed from the federal government to pay unemployment benefits, a temporary surcharge may be added to your FUTA rate. This surcharge phases out as the state repays the loan. You can check your state's status on the Department of Labor website, and your payroll service or tax professional can tell you if it affects your rate.