Federal Unemployment Tax Act (FUTA)
What is FUTA tax?
The Federal Unemployment Tax Act (FUTA) is a federal law requiring employers to pay unemployment tax. Similar to the State Unemployment Tax Act (SUTA), FUTA funds state unemployment programs and benefits for workers who have lost their jobs and who meet certain conditions.
Both FUTA and SUTA provide funds for unemployment insurance programs. However, FUTA is managed by the IRS at a federal level, while SUTA is managed and collected by individual state governments.
Employers must file a FUTA tax form (Form 940) every year, as well as pay the tax in the form of a quarterly deposit. FUTA taxes are due the last day of the month at the end of the quarter.
What is the federal unemployment tax rate?
The federal unemployment tax rate is 6% of the first $7,000 paid to each employee each year. Employers should stop paying the tax after the employee has been paid more than $7,000—known as the FUTA wage base.
In most states, if you’ve paid in to your state unemployment program, you’ll receive an unemployment tax credit of 5.4%, which lowers the total FUTA tax rate to 0.6%.
Who pays FUTA tax?
Most employers are required to pay FUTA taxes. Specific requirements dictate that an employer must pay this tax if they paid wages of $1,500 or more during any calendar quarter, or if they had at least one employee for at least part of the day for 20 weeks or more within a calendar year period. It's illegal to withhold the value of this tax from an employee’s wages.
Who is exempt from paying FUTA?
There are different laws determining who is exempt from paying federal unemployment tax: the general test, household employees test, and farmworkers’ employees test.
- Most employers use the general test and must pay FUTA tax. An employer is exempt from paying FUTA only if they have paid an employee less than $1,500 in wages during a calendar quarter, or if they haven’t had an employee for 20 weeks or more within a calendar year.
- The household employees test dictates that a company is subject to FUTA tax if they paid $1,000 or more to a household employee in a calendar quarter. A household employee is defined as anyone who works in a private home, fraternity, or sorority doing household work.
- The agricultural employees (farmworkers’) test requires a business to pay the FUTA tax if they paid $20,000 or more to farmworkers in any calendar quarter, or if they employed 10 or more farmworkers for some part of a day during 20 or more different weeks in a calendar year.
Are nonprofits exempt from FUTA?
Certain nonprofits are exempt from FUTA, while others are required to pay the unemployment tax. Nonprofits that qualify as 501(c)(3) organizations are exempt from paying FUTA. These are usually public charities that give away funds directly to a cause like the humanities, education, health services, and more.
An organization must apply for 501(c)(3) status and be granted the status legally through the IRS to be exempt from FUTA. All other nonprofit organizations must pay the federal unemployment tax.
How to calculate FUTA tax
To calculate the FUTA rate, multiply each employee’s wages up to $7,000 paid in the quarter by 0.6%. Add up the totals, and this is the net quarterly FUTA tax you owe the government. This amount is due on the last day of the month at the end of the calendar quarter.
When does the FUTA rate change?
FUTA rates haven't increased substantially since the early 1980s. Stay up to date with IRS and state tax agency updates.