FUTA (Federal Unemployment Tax Act)

The Federal Unemployment Tax Act imposes a payroll tax on employers only — it is never deducted from an employee's pay. The headline rate is 6.0%, applied to the first $7,000 of wages paid to each employee in a calendar year. Employers who pay their state unemployment insurance contributions on time and in full receive a credit of up to 5.4%, dropping the effective federal rate to 0.6%, or a maximum of $42 per employee per year.

Because the wage base is so low, FUTA is front-loaded: a full-time employee typically finishes their entire FUTA liability inside the first quarter of the year. The tax funds administration of the unemployment system and the federal share of extended benefits; the benefits an unemployed worker actually receives are paid from state unemployment funds, financed by SUTA.

Employers report FUTA annually on Form 940, due 31 January for the prior year. Deposits are made quarterly through EFTPS whenever accumulated liability exceeds $500; if it stays under $500 in a quarter, the amount rolls forward. Missing the deposit path — paying by cheque when electronic deposit is required — is one of the most common small-employer penalties.

A state that has borrowed from the federal unemployment account and not repaid within roughly two years becomes a credit reduction state. Employers there lose part of the 5.4% credit, typically in 0.3% annual increments, so their effective FUTA rate rises above 0.6%. The list changes year to year and is published with the Form 940 instructions, so a multi-state employer cannot assume a flat 0.6% across the whole workforce.

An employer owes FUTA if it paid $1,500 or more in wages in any calendar quarter, or employed at least one person for some part of a day in 20 or more different weeks in the year. Separate tests apply to household and agricultural employers. Payments to genuine independent contractors are not FUTA wages — which is precisely why misclassification assessments so often include back FUTA with interest and penalties.

Some payments are excluded from the wage base, including certain fringe benefits, employer contributions to qualified retirement plans, and group-term life insurance within limits. Wages paid to employees working entirely outside the United States for a foreign employer are generally outside FUTA, which is where global employment structure starts to matter.