The Federal Unemployment Tax Act (FUTA) is a U.S. federal law that imposes a tax on employers to fund the unemployment compensation program. This program provides temporary financial assistance to workers who have lost their jobs through no fault of their own. The FUTA tax is paid solely by employers (not employees) and helps finance state unemployment agencies and job services.
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Key Facts
- Employer-Paid Tax: Only employers pay FUTA tax; employees do not contribute.
- Tax Rate and Wage Base: The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages annually. Employers can receive up to a 5.4% credit for paying state unemployment taxes, reducing the effective federal rate to 0.6%.
- Quarterly Reporting and Payment: Employers report FUTA tax on Form 940 quarterly and pay the tax annually or quarterly, depending on liability.
- Funds State Programs: FUTA revenue supports state unemployment insurance (UI) programs and administrative costs.
- Eligibility for Tax Credit: To claim the full 5.4% credit, employers must pay state unemployment taxes on time and comply with state laws.
- Separate from Social Security and Medicare Taxes: FUTA is distinct from FICA taxes and has its own wage base and rate.
- Exemptions: Certain nonprofit organizations, state and local governments, and household employers may be exempt or subject to different rules.
1. Who pays the FUTA tax?
Only employers pay FUTA; employees do not pay any portion.
2. How much is the FUTA tax rate?
The tax rate is 6.0% on the first $7,000 of wages per employee per year, but credits for state unemployment taxes typically reduce it to 0.6%.
3. How is FUTA tax reported and paid?
Employers file Form 940 annually and generally pay taxes quarterly if their liability exceeds $500.
4. What is the wage base limit for FUTA?
FUTA only applies to the first $7,000 of wages paid to each employee annually.
5. Are all employers required to pay FUTA?
Most private employers with at least one employee must pay, but some nonprofits, government entities, and household employers may be exempt.
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