What Is FUTA?

FUTA (Federal Unemployment Tax Act) is a federal payroll tax that employers pay to fund the federal portion of unemployment insurance programs — only employers pay FUTA, not employees. The standard FUTA tax rate is 6% applied to the first $7,000 of each employee's wages, but most employers qualify for a credit of up to 5.4% for state unemployment taxes paid, reducing the effective federal rate to just 0.6% per employee per year. At the reduced rate, the maximum annual FUTA cost per employee is $42 — a relatively small expense. FUTA is reported annually on Form 940, though if FUTA liability exceeds $500 in any quarter, you must make a deposit by the end of the following month. Unlike Social Security and Medicare taxes, FUTA only applies to the first $7,000 of annual wages, so most FUTA liability is incurred during the first quarter of the year.