Employers pay federal unemployment tax, not workers

Federal unemployment tax (FUTA) is paid by employers, not deducted from your paycheck. The employer sends the money directly to the federal government and to state unemployment insurance funds. You will not see FUTA taken out of your wages the way you see Social Security or Medicare withholding.

The tax rate and wage base change each year. For 2024, most employers pay 6.0% on the first $7,000 of each employee's annual wages — though employers in states with very low unemployment rates may pay a lower federal rate. The key point: the employer bears this cost entirely, and it does not reduce what you earn.

Key Takeaways

  • Employers pay FUTA tax at a rate set by the federal government, currently 6.0% for most states on wages up to $7,000 per employee per year.
  • The tax funds both the federal unemployment trust fund and state unemployment insurance programs that pay benefits to workers who lose jobs.
  • Certain employers are exempt from FUTA, including government agencies, nonprofits, and some agricultural or domestic employers.
  • States with lower unemployment rates may receive a credit that lowers their federal FUTA rate, but employers still pay something.
  • FUTA is separate from state unemployment insurance taxes, which vary widely by state and are also paid by employers.

Which employers must pay FUTA

Not every employer pays federal unemployment tax. You are subject to FUTA if you pay wages to employees and meet one of two tests: either you paid $1,500 or more in wages in any calendar quarter during the current or prior year, or you had at least one employee on the payroll for at least one day in each of 20 different weeks during the current or prior year.

Employers exempt from FUTA include federal, state, and local government agencies; most nonprofit organizations exempt under section 501(c)(3) of the tax code; railroads (which have their own unemployment insurance system); and certain agricultural employers and domestic employers who pay household workers. If you work for one of these types of employers, FUTA does not fund your unemployment benefits — different rules explore.

How the FUTA tax rate works

The federal FUTA rate is set by Congress and applies nationwide, but states can lower an employer's federal rate through a credit system. This credit rewards states that have built up reserves in their unemployment trust funds and penalizes states that have borrowed from the federal fund during recessions.

In 2024, the standard federal rate is 6.0%, but an employer in a state with a strong reserve position might pay only 0.6% federally because the state credit reduces the rate by up to 5.4 percentage points. An employer in a state that borrowed from the federal fund during the pandemic, by contrast, may pay closer to the full 6.0%. The wage base — the amount of each employee's wages subject to the tax — is $7,000 per year, set by federal law.

This means the maximum FUTA tax per employee per year is $420 (6.0% of $7,000) for employers in states with no credit, and as low as $42 (0.6% of $7,000) for employers in states with the full credit. Once an employee earns $7,000 in a calendar year, no more FUTA is owed on that employee's wages for that year.

State unemployment insurance taxes are separate

FUTA funds only part of the unemployment system. States run their own unemployment insurance programs and collect their own payroll taxes from employers. State unemployment tax rates and wage bases vary dramatically — some states tax wages up to $8,000 per year, others up to $42,000 or more, and rates range from under 1% to over 5% depending on the employer's history of layoffs.

An employer pays both FUTA and state unemployment tax. These are not the same bill. When you file for unemployment benefits after losing a job, the money comes from the state fund, not the federal FUTA fund. However, the federal fund can lend to states during recessions when claims exceed reserves, which is why the FUTA credit system exists — to encourage states to keep their funds solvent.

What FUTA money funds

FUTA revenue goes to two places: the federal unemployment trust fund and state unemployment insurance accounts. The federal portion pays for the administrative costs of state unemployment programs — the staff who process claims, investigate fraud, and maintain the system. The state portion goes directly into each state's unemployment insurance fund, which pays regular unemployment benefits to workers who lose jobs through no fault of their own.

During recessions, when unemployment spikes and claims exceed what states have collected in taxes, states can borrow from the federal trust fund. This is why FUTA exists: to create a reserve that smooths out the ups and downs of the economy. Employers in states that borrowed during the pandemic are now paying higher federal rates as those loans are repaid.

How FUTA affects your unemployment benefits

FUTA does not determine whether you receive unemployment benefits or how much you get. Your benefits depend on state law, your prior wages, and the reason you left work. However, FUTA indirectly affects you by funding the system that processes your claim and pays your benefits.

If your employer did not pay FUTA (because they were exempt or fell below the threshold), you may not be covered by unemployment insurance at all. Government employees, for example, are covered by different systems — some states offer unemployment benefits to government workers, others do not. Nonprofit employees may or may not be covered depending on whether the nonprofit elected to pay into the state system. If you work for a covered employer, FUTA ensures the state has the resources to pay your claim when you lose your job.

Frequently Asked Questions

Can I see how much FUTA my employer paid on my behalf?

No — FUTA does not appear on your pay stub because it is not deducted from your wages. Your employer reports FUTA to the IRS on Form 940 each year, but that information is not shared with you. You can ask your employer's payroll department if you want to know whether they are subject to FUTA, but the amount paid is not your concern for benefits purposes.

Does FUTA cover me if I work for a nonprofit?

It depends. Nonprofits exempt under section 501(c)(3) are not required to pay FUTA, but many choose to anyway. Ask your nonprofit's HR department whether they pay into the state unemployment system. If they do not, you may not be covered by unemployment insurance when you lose your job.

What happens if my employer goes out of business before paying FUTA?

FUTA is owed to the federal government, not to you. If your employer fails to pay, the IRS pursues collection. This does not affect your unemployment benefits — the state fund pays claims regardless of whether the employer paid FUTA. However, unpaid FUTA can be a sign the employer is in financial trouble, which may affect your ability to recover unpaid wages.

Does FUTA change every year?

The wage base ($7,000) changes rarely, but the federal rate and state credits change annually based on economic conditions and state fund balances. Your employer's rate for 2024 may differ from 2023. You do not need to track these changes — your employer handles FUTA reporting and payment.