Payroll & Tax
Federal Unemployment Tax
What is Federal Unemployment Tax?
Federal unemployment tax is the employer-paid US tax imposed under FUTA at 6.0% on the first $7,000 of each employee's annual wages, reduced to an effective 0.6% for employers who pay their state unemployment tax on time.
The federal and state split
US unemployment insurance is funded from two sides. The federal unemployment tax, imposed by FUTA, pays for administration of the system, half the cost of extended benefits during downturns, and a loan fund that states draw on when their own reserves run dry. State unemployment tax — SUTA — pays the benefits themselves. Employers pay both, and neither is withheld from employee wages, with a narrow exception in a handful of states that levy a small employee contribution.
The federal rate is 6.0% on the first $7,000 of annual wages per employee. Employers who pay state unemployment contributions in full and on time claim a credit of up to 5.4%, leaving an effective rate of 0.6% and a maximum of $42 per employee per year. Employers in credit reduction states — those with unrepaid federal loans — lose part of that credit and pay more.
SUTA rates and experience rating
State unemployment tax is where the real money sits. Rates are experience-rated: an employer whose former employees draw heavily on benefits pays a higher percentage in later years. Wage bases vary enormously, from the federal-matching $7,000 in a few states to well above $50,000 in Washington and Oregon, and new employers start on a standard entry rate until they build a claims history. Two companies with identical payrolls in different states can face materially different unemployment costs.
Each state requires its own unemployment insurance account, quarterly wage reporting and separate returns. Hiring a single employee in a new state creates a permanent registration and filing obligation there, which is the administrative reality behind the apparent simplicity of remote US hiring.
Deposits, filing and exclusions
Federal unemployment tax is deposited quarterly through EFTPS once accumulated liability exceeds $500; below that the balance carries forward to the next quarter and ultimately to the annual return. Form 940 reports the year and is due 31 January, with an extension to 10 February for employers who deposited everything on time. Payments to genuine independent contractors are outside the tax base, which is why misclassification assessments routinely include back federal and state unemployment tax alongside income tax withholding and FICA.
Why it matters when hiring globally
- Unemployment tax is a state-by-state cost, not a national one, so US remote hiring is only as simple as the number of states you have registered in — every new state adds an account and a quarterly return.
- TalentStores' Employer of Record route puts those registrations with a partner that already holds them, so hiring a second US employee in a new state does not create a new compliance footprint for you.
- For roles that do not need to sit in the US, the comparison is starker: an India-based hire through TalentStores carries no EOR fee and none of the state unemployment stack, at a flat $39/hour for standard roles.
Frequently asked questions
Who pays federal unemployment tax?
The employer, entirely. Federal unemployment tax is never withheld from employee wages. The effective rate is 0.6% on the first $7,000 of each employee's annual wages when state unemployment contributions are paid on time.
How is federal unemployment tax reported?
Annually on Form 940, due 31 January for the prior calendar year, with quarterly deposits through EFTPS whenever accumulated liability passes $500.