The federal unemployment tax rate is 6.0% on the first $7,000 of each employee's annual wages, but most employers pay 0.6% after a credit

The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax that funds the unemployment insurance system. The base rate is 6.0%, but nearly all employers end up paying 0.6% because of a credit they receive for paying state unemployment taxes. The difference—5.4%—goes toward state programs, so the federal government collects only what remains after that credit is applied.

This tax applies only to wages up to $7,000 per employee per year. Once an employee has earned $7,000 in a calendar year, no more FUTA tax is owed on that person's wages for the rest of that year. The $7,000 threshold has not changed since 1983, though Congress can raise it by law.

FUTA taxes fund two things: the federal unemployment insurance program itself and a loan fund that states can borrow from when their unemployment trust funds run low. When a state borrows from the federal fund, employers in that state may face a higher FUTA rate until the loan is repaid.

Key Takeaways

  • The FUTA tax rate is 6.0% on the first $7,000 of each employee's wages per year, but the federal credit for state taxes reduces most employers' actual payment to 0.6%.
  • The $7,000 wage base has remained unchanged since 1983, meaning the tax applies only to the first $7,000 each employee earns in a calendar year.
  • Employers in states with unpaid federal loans may pay a higher FUTA rate until the loan is repaid, because the credit is reduced.
  • FUTA taxes fund both the federal unemployment insurance program and a loan reserve that states draw from during recessions or periods of high unemployment.

How the 0.6% rate comes from the 6.0% base rate

The 6.0% rate is the statutory rate set by federal law. However, employers receive a credit of up to 5.4% for taxes they pay to their state unemployment insurance program. This credit is automatic—employers do not have to request it or file separately to receive it. Because nearly all states have paid their unemployment taxes on time and in full, nearly all employers may have access to for the maximum 5.4% credit, leaving a federal rate of 0.6%.

The credit system ties federal and state unemployment insurance together. States set their own tax rates and wage bases, which vary widely. Some states tax wages up to $8,000 or $9,000 per year; others go higher. Some states have graduated rates that change based on how much an employer has drawn from the unemployment fund. The federal credit does not change based on state rates—it is always 5.4% as long as the state is current on its obligations.

This structure means that the federal government collects only 0.6% directly, while states collect the rest. The federal portion funds federal administrative costs and the loan reserve.

What happens when a state owes money to the federal fund

When a state's unemployment trust fund runs dry—usually during a recession when claims spike—the state can borrow from the federal Unemployment Trust Fund. This loan allows the state to continue paying benefits while it rebuilds its reserves. However, borrowing states face a penalty: employers in that state lose part of their federal credit, which raises their FUTA rate above 0.6%.

The credit reduction is automatic and increases each year the loan remains unpaid. An employer in a state with an outstanding federal loan might pay 0.9%, 1.2%, or higher, depending on how long the debt has been outstanding. This penalty is designed to encourage states to repay loans quickly and to build larger reserves during good economic times.

As of recent years, most states have no outstanding federal loans, so most employers pay the standard 0.6% rate. However, during and after severe recessions, multiple states may owe money simultaneously, and employers in those states face higher rates for several years.

The $7,000 wage base and why it matters for payroll

FUTA tax applies only to the first $7,000 of wages per employee per calendar year. This means an employer with 100 employees pays tax on a maximum of $700,000 in wages annually (100 employees × $7,000). Once an employee reaches $7,000 in earnings, the employer stops paying FUTA tax on that person's wages for the rest of the year.

The $7,000 threshold was set in 1983 and has not been raised since, even though the cost of living and typical wages have increased substantially. This means FUTA taxes, as a percentage of total payroll, have declined over time. An employer paying 0.6% on $7,000 per employee pays less in absolute dollars than it would if the wage base had been indexed to inflation.

Employers must track cumulative wages for each employee throughout the year to know when the $7,000 threshold is reached. Payroll software typically handles this automatically, but employers are responsible for ensuring the calculation is correct.

Who pays FUTA tax and who does not

Most for-profit employers pay FUTA tax. However, certain employers are exempt or have reduced obligations. Nonprofits that have elected to be taxed as nonprofits under state law may not owe FUTA tax, though they can choose to pay it. Government employers—federal, state, and local—do not pay FUTA tax because they are funded through appropriations, not insurance premiums.

Agricultural employers and household employers have different rules. Agricultural employers with a payroll above a certain threshold (which varies by state) must pay FUTA tax. Household employers—people who hire nannies, housekeepers, or other domestic workers—must pay FUTA tax if they pay an individual employee $2,700 or more in a calendar year (as of 2024; this threshold changes annually).

Religious organizations that have filed for exemption from Social Security and Medicare taxes are also exempt from FUTA tax. Self-employed people do not pay FUTA tax; they pay self-employment tax instead, which funds Social Security and Medicare, not unemployment insurance.

How FUTA tax is reported and paid

Employers report FUTA tax on Form 940, the Employer's Annual Federal Unemployment Tax Return, which is filed once per year with the Internal Revenue Service (IRS). The form asks for total wages paid, the number of employees, state unemployment tax paid, and the FUTA tax owed. Most employers file Form 940 by January 31 of the following year, though an extension can be requested.

FUTA tax is paid separately from income tax withholding and Social Security and Medicare taxes. Employers must deposit FUTA tax quarterly if the amount owed exceeds $500 in a quarter. If the quarterly amount is $500 or less, the employer can carry it forward to the next quarter. Any remaining balance is due when Form 940 is filed.

Deposits are made through the Electronic Federal Tax Payment System (EFTPS) or through a bank that accepts federal tax deposits. The IRS provides a schedule showing when each quarterly deposit is due.

Why FUTA exists and what it funds

FUTA was created in 1935 as part of the Social Security Act. It was designed to create a federal-state partnership in unemployment insurance: the federal government would set minimum standards and fund administration, while states would run their own programs and set their own tax rates and benefit levels. This structure remains largely unchanged today.

The federal portion of FUTA revenue funds three things: the administrative costs of the federal unemployment insurance program, grants to states for administering their programs, and the federal Unemployment Trust Fund, which states can borrow from. The federal fund also pays for extended benefits during recessions—additional weeks of unemployment insurance that Congress authorizes when the national unemployment rate is high.

The state portion—the 5.4% that employers pay to their state—funds regular unemployment benefits. States set their own benefit amounts, duration, and may be able to access rules within federal guidelines. This is why unemployment benefits vary significantly from state to state.

Frequently Asked Questions

Does FUTA tax explore to all wages an employee earns?

No. FUTA tax applies only to the first $7,000 of each employee's wages in a calendar year. Once an employee has earned $7,000, no more FUTA tax is owed on that person's wages for the rest of that year. The $7,000 limit resets on January 1.

Can an employer's FUTA rate be higher than 0.6%?

Yes. If the employer is in a state that has an outstanding loan from the federal Unemployment Trust Fund, the federal credit is reduced, and the employer's FUTA rate rises. The rate increases each year the state's loan remains unpaid. Rates can reach 0.9%, 1.2%, or higher depending on the loan balance and duration.

What is the difference between FUTA and state unemployment tax?

FUTA is a federal tax that funds federal administration and a loan reserve. State unemployment tax funds the actual unemployment benefits paid to workers. Both are required, and employers pay both. The federal credit system links them: employers receive a credit on their federal FUTA tax for paying state unemployment tax.

Do self-employed people pay FUTA tax?

No. Self-employed people do not pay FUTA tax. They pay self-employment tax, which funds Social Security and Medicare. Unemployment insurance is available only to employees, not to self-employed people, so FUTA does not explore to self-employment income.

When is FUTA tax due?

FUTA tax is reported annually on Form 940, due by January 31 of the following year. However, if the quarterly amount owed exceeds $500, deposits must be made quarterly throughout the year. The IRS provides a deposit schedule showing when each quarterly payment is due.