What is FUTA and how to calculate it

Summary:

• FUTA is a payroll tax used for unemployment benefits. Unlike FICA taxes, it’s solely covered by the employer.

• FUTA can be as low as $42 per employee annually, but it can quickly become significant for bigger workforces spanning different states.

• Payroll software simplifies and automates FUTA calculations, ensuring timely payments and accurate filing.

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The Federal Unemployment Tax Act (FUTA) is a key component of payroll taxes and a critical responsibility of employers. It funds unemployment benefits and provides a safety net for unemployed workers. 

A clear understanding of FUTA and other payroll taxes is vital for business owners. This guide will explain what employers need to know about FUTA, how to calculate it, and practical tips to simplify the process.

What is FUTA?

Administered by the Department of Labor, FUTA is a payroll tax intended to fund unemployment insurance and job programs across the United States. Unlike the Federal Insurance Contributions Act taxes (Social Security and Medicare), FUTA is solely the employer’s responsibility. There is no employee contribution or employer match. However, the FUTA amount an employer owes is directly tied to employee wages. 

Generally, employers are obligated to pay FUTA if they:

• Paid wages of $1,500 or more to employees in any calendar quarter during the last two years. 
• Had at least one employee for part of a day in 20 or more different weeks during the previous two years.

The Internal Revenue Service (IRS) uses a rolling assessment model for the above criteria, which looks at current operations and recent employment patterns. As we transition to 2025, the reference years for calculation are 2023 and 2024.

FUTA rules for agriculture and household employers
Because of their work patterns and employment relationships, there are specific rules for household and agricultural employers. For instance, agricultural work is seasonal, while household employees are often hired in small-scale settings. 

Household: 

Employers must pay FUTA taxes for household employees who perform work in a private home, local college club, fraternity or sorority chapter if they pay a total of $1,000 or more in cash wages during any calendar quarter in the current or preceding two calendar years.

Agriculture:

Employers who have farmworkers must pay FUTA taxes if they:

• Paid cash wages of $20,000 or more to farmworkers during any calendar quarter in the current or preceding two calendar years
• Employed 10 or more farmworkers working at any time during 20 or more different weeks in the current or previous two years.

Are there FUTA exemptions for small businesses and self-employed individuals?

If you’re running a small business and don’t meet the IRS criteria, you are exempt from FUTA tax. The same goes if you hire independent contractors instead of full-time employees.

Self-employed individuals are generally exempt from FUTA tax liabilities. 

Also read: How to Manage Compliance for Contractors

FUTA credit reduction

The FUTA tax rate is 6% and applies to the first $7,000 of an employee’s annual wages. This is known as the federal wage base. Most employers can qualify for a 5.4% tax credit, bringing the FUTA tax rate down to just 0.6% per employee. That’s only $42 per employee per year if all conditions are met. 

Employers can qualify for the tax credit under the following conditions: 

• The State Unemployment Tax Act (SUTA) tax must be fully paid by the Form 940 deadline, before January 31.
• The FUTA applies to the same $7,000 wage base. You automatically meet this condition if your state’s wage base is higher. If it’s lower, you may not qualify for the full tax credit. 
• The state is not a credit reduction state. A state is considered a credit reduction state if it received a loan from the federal government to fund its unemployment benefits and failed to pay it back within two years. If the state has an outstanding loan balance from the federal government on January 1 for two consecutive years and fails to repay it in full by November 10 of the second year, the FUTA tax credit for employers in that state is reduced by 0.3% each year, and the loan remains unpaid.

How to calculate FUTA tax liability

FUTA tax is calculated quarterly for deposit purposes. The tax report, on the other hand, is filed annually through the Form 940. 

Here are two example methods of FUTA calculations, assuming that the employer is eligible for the maximum credit (5.4%): 

Example 1: 

1. Subtract the maximum allowable state credit (5.4%) from the FUTA rate (6.0% in 2024).
2. Multiply each employee’s wages, up to the $7,000 wage base, by 0.6%.
3. Total these amounts for your net quarterly FUTA tax liability.

Example 2:

1. Calculate the gross FUTA tax liability by multiplying each employee’s taxable wages (up to $7,000) by the full FUTA rate of 6.0%.
2. Determine the maximum allowable credit by multiplying the same taxable wages by 5.4%.
3. Subtract the credit amount from the gross liability to get the net liability.

FUTA calculations can be straightforward if operating in a non-credit reduction state that matches the federal wage base. However, it can become more complicated when you operate in states considered credit reduction states or states where the wage base is different from the federal one. 

When are FUTA liabilities paid?

FUTA tax payments are typically due quarterly, but whether you need to pay each quarter depends on how much FUTA tax you owe. 

Quarterly payment due dates

If you owe FUTA taxes for the quarter, payments are due by:

• April 30 for the first quarter
• July 31 for the  second quarter
• October 31 for the  third quarter
• January 31 for the fourth quarter of the previous calendar year

Do you need to pay this quarter? 

Here are general guidelines in terms of timing your FUTA deposits:

• If you have $500 or more in FUTA liability in a calendar year, you should pay by the next quarterly deadline. 
• If it’s less than $500 in a quarter, you can roll it over to the next quarter and continue doing so until your cumulative amount due is more than $500. 
• If your liability for the entire year is less than $500, you can wait and pay it when filing Form 940, due by January 31.

What if the deadline falls on a non-business day (weekend or legal holiday)? You can make your payments on the next business day, which will still be considered on time.

How to pay FUTA tax liabilities

FUTA taxes are primarily paid to the U.S. government via the Electronic Federal Tax Payment System (EFTPS). This 24/7 free service offered by the U.S. Department of Treasury, allows employers to make payments, track payment history, schedule a payment in advance, and get support when making tax payments. 

An alternative method is same-day wire transfers, where the employer makes direct payments via bank, but this can incur transaction fees. Another option is to delegate tax payments through a payroll service provider or tax professional.

Reporting FUTA Tax Payments

FUTA taxes are reported annually using Form 940, the Employer’s Annual Federal Unemployment Tax Return. In this IRS form, employers document all FUTA tax payments made during the year and disclose any remaining amounts due.

The filing deadline is January 31, but if all FUTA tax deposits are paid on time, employers get a grace period until February 10 to submit the form. While Form 940 focuses exclusively on federal unemployment taxes, it’s often compared to Form 941, which covers payroll taxes like Social Security and federal income tax withheld from employees’ wages.

FUTA and SUTA: What sets them apart?

FUTA and SUTA are similar because they have the same overarching purpose: to fund unemployment programs. However, there are some operational differences. The most obvious difference is that FUTA is imposed on a federal level, while SUTA is a state-specific tax that goes to unemployment insurance programs for eligible workers in the state. 

Another key difference is the FUTA tax credit. Employers who make timely SUTA payments can qualify for up to a 5.4% credit, which can reduce their FUTA liability. On the other hand, SUTA is strictly a state-imposed tax and doesn’t have a tax credit system. 

Like FUTA, SUTA tax is also imposed on a wage base. However, FUTA uses a uniform base of $7,000, while SUTA wage bases vary. Some states like Arkansas and California follow the same $7,000 base as the federal government. While states like Washington and New York impose higher bases. Specific industries have additional assessments or alternate rates, so it’s always good pratice to review your state’s latest guidelines. 

Another key difference between FUTA and SUTA is who foots the bill. FUTA is entirely paid by the employer. In the case of SUTA, some states like Pennsylvania and New Jersey, require both employers and employees to contribute.

Simplify FUTA calculations with Workforce.com

FUTA tax liabilities may seem small at just $42 per employee annually, but, it can quickly increase as your workforce grows and spans multiple states. As a result, managing FUTA and other payroll taxes can become more complex. 

Workforce.com can help you stay on top of FUTA tax liabilities and other employment taxes. Here are some of the ways the platform can help streamline your process.

Automated payroll calculations and reporting

Workforce.com’s payroll system automatically calculates wages when you reach the FUTA wage base. It helps ensure timely tax payments and handles overtime, payroll taxes , and deductions. 

Accurate time and attendance tracking

Since FUTA calculations are tied to wages, accurate time and attendance tracking is essential. Wokforce.com ensures that employee hours are recorded in real-time so that hourly wages are always precise and tax calculation errors are avoided. 

Unified employee data

Employee information, such as pay rates and employment status, is centralized in a single profile, eliminating redundant data entry. This single source of information powers payroll computations and includes FUTA tax liabilities. 

If you run an hourly workforce, discover how Workforce.com can help you comply with FUTA obligations and other payroll or labor regulations. Want to see it in action? Get a demo and learn how it can simplify HR, scheduling, and payroll for your hourly team.