What is FUTA? An Employer’s Guide to Unemployment Tax

What is FUTA?

FUTA stands for the Federal Unemployment Tax Act— it helps cover the cost of unemployment insurance and state employment agencies. As an employer, you’re required to pay unemployment tax for each employee working for you. This comes out of your pocket—it isn’t money withheld from their pay, as with the Federal Insurance Contributions Act (FICA).

FUTA is calculated and paid quarterly—so long as your FUTA tax liability is over $500 for the quarter. (We’ll get into details below.)

After the end of the financial year, you report all FUTA you’ve paid—and all unemployment tax you have yet to pay—on Form 940.

What is SUTA?

Each state has its own unemployment tax too—SUTA stands for State Unemployment Tax Act, which funds state unemployment insurance.

In most cases, the employer pays SUTA (with the exception of Alaska, Pennsylvania, and New Jersey, where the cost is shared by employer and employee).

To see the SUTA tax rate for your state, see the breakdown by SurePayroll.

Where did FUTA come from?

FUTA was born in the Great Depression. By 1932, one quarter of all workers in the USA were unemployed. A couple of years later, Franklin Delano Roosevelt declared the country needed “some safeguard against misfortunes which cannot be wholly eliminated in this man-made world of ours.”

The federal government established a system of social security to protect workers in the face of economic turmoil. The Federal Unemployment Tax Act of 1939 was part of this: taking a little bit of money from each employer through an employer tax, and using it to create unemployment benefits to help out-of-work Americans.

Today, FUTA helps to fund unemployment insurance.

Who needs to pay FUTA?

FUTA is paid by every employer—nothing gets deducted from the employee’s wages. But there are a couple other requirements to meet if you’re going to be eligible.

You’re required to pay FUTA if:

• You paid more than $1,500 to employees during at least one calendar quarter, and
• You’ve had one or more employees during 20 or more different weeks of the year. Full-time, part-time, and temporary workers all count. The days they worked do not have to be full days.

An employee is anyone you file Form W-2 for. Contract workers—people who get Form 1099-NEC—don’t count as “employees”.

Further reading: 1099s vs. W-2s: Which Should You Hire?

What is the FUTA tax rate?

The FUTA rate is 6.0% (before state tax credits) of what you paid an employee during the quarter. It only applies to the first $7,000 they earned—this is called the FUTA wage base.

So, if you paid an employee $8,000, you pay 6.0% (before state tax credits) of $7,000 in FUTA. But if you paid an employee $6,000, you pay 6.0% of $6,000 in FUTA.

You may make extra payments to employees, besides their salary or wages: cost of meals or lodging, some moving expenses, health plans, group life insurance benefits, or employee retirement funds like 401(k)s. You can find a complete list of these “fringe” benefits in the Instructions for Form 940.

The FUTA tax credit

If the 6.0% unemployment tax rate seems like it’s opening a hole in your wallet, don’t worry—the actual amount you end up paying is considerably less.

Every state receives a tax credit to partially cover employers’ FUTA payments. That tax credit is 5.4% of the unemployment tax. So, at the end of the day, you only pay 0.6% of what each of your employees earned during the quarter—on the first $7,000.

Unfortunately, depending on your state, you might not be able to claim the full credit. Some states have to borrow from the federal government to cover the cost of UI. According to the Internal Revenue Service (IRS),

“If a state has outstanding loan balances on January 1 for two consecutive years, and does not repay the full amount of its loans by November 10 of the second year, the FUTA credit rate for employers in that state will be reduced until the loan is repaid.”

Those states are then called “credit reduction states” and can’t offer the full FUTA reduction.

To see if yours is a credit reduction state, check out this Department of Labor (DOL) page.

Six steps for calculating FUTA

Complete the following steps for each employee to calculate what you owe in FUTA.

1. Add up the gross salary or wages for the employee during the quarter. (“Gross” means before withholdings like FICA).
2. Add the value of all fringe benefits.
3. Deduct the value of all exempt fringe benefits, as outlined in the instructions for Form 940.
4. Add the value of the remaining fringe benefits to the employee’s gross salaries or wages for the quarter.
5. Take away from the total gross salary or wages any amount higher than $7,000. You should be left with $7,000 maximum.
6. Multiply the final number by 0.06. This is what you owe for FUTA for the quarter.

Paying FUTA

It’s a good idea to set aside “FUTA money” in advance—so your wallet doesn’t take a surprise hit at the end of each quarter. Then, you’ve got to pay FUTA taxes to the IRS. Let’s look at how to do both.

Setting aside FUTA money

An easy way to keep track of FUTA savings on your books, and make sure you have enough, is to set aside money every time you pay an employee.

Here’s a step-by-step process:

1. Based on how much your employee typically earns (including non-exempt fringe benefits, if any), estimate their average quarterly gross earning.
2. Calculate the FUTA for that amount (0.06 times the first $7,000).
3. Count the number of paychecks the employee will receive for the quarter. Then divide the FUTA you calculated by the number of paychecks.
4. Every time you withdraw your employee’s pay, set aside the resulting amount in an appropriately named account— like "payroll taxes” or "unemployment taxes”. The money you set aside should come from your retained earnings.

To simplify things, you can carry out these calculations for each employee, and set aside a lump sum every pay cycle.

How to pay unemployment taxes

Here’s everything you need to stay on top of paying FUTA.

Getting an Employer Insurance Number (EIN)

Before you pay unemployment taxes, you’ll need an EIN. If you’ve got employees already, you probably have an EIN. But just in case, here’s how you apply for one online.

Transferring the money

The easiest way to get the money out of your bank account and into the IRS’ hands is through the Electronic Federal Tax Payment System. You can open an account on the main page of the site. You’ll need your business information (including EIN), contact information, and bank routing numbers to make the transfer.

When to pay FUTA

This is where it gets a little tricky. Because, even though FUTA payments are quarterly, you may not have to pay every quarter.

Here’s why. At the end of the quarter, if you owe less than $500 in unemployment taxes, you don’t pay. Instead, you carry over the amount into the next quarter.

Say, at the end of Q1, you owe $300 in FUTA. Instead of paying, you carry it over. Then, let’s say that, for Q2 alone, you’ll owe $300. Add that to the $300 carried over from Q1, and you end up owing $600. So, after Q2 ends, you should send the IRS $600.

This applies for as many quarters as it takes to build up to that $500 minimum.

FUTA quarterly payment deadlines

The due dates for your quarterly payments of unemployment tax fall at the end of the month following the close of the quarter. That means:

• January 31, 2024 (for the fourth quarter of 2023)
• April 30, 2024 (for the first quarter of 2024)
• July 31, 2024
• October 31, 2024
• January 31, 2023

Form 940: The FUTA tax form

Form 940 is the Employer’s Annual Federal Unemployment (FUTA) tax return. It tells the IRS how much money you paid in unemployment taxes over the course of the year. It also tells the IRS how much you still have left to pay, in case you didn’t owe enough ($500 or more) to make a payment for the latest quarter.

Helpful resources:

• Form 940: How to File Your FUTA Tax Return
• New Employee Forms: What You’ll Need for New Hires

What you need to file Form 940

Before you fill out and file Form 940, get the following info together:

• The total FUTA payments you have paid and owe for all employees for the calendar year
• The total value of exempt payments for the year. These are typically fringe benefits like employee health and retirement plans
• The total payments you made to all employees in excess of $7,000 for the year

What goes where on Form 940

Here’s a breakdown of the key parts of Form 940:

a. In Section 1a, if you only pay state unemployment tax in one state, enter you state’s abbreviation here.

b. If you have employees in more than one state, this is where you report the fact. Once you check off the box, you’ll need to fill out Form 940, Schedule A, where you report which states you have employees in, and how much in taxable wages you paid in each state.

c. If you have employees in a state that is subject to a credit reduction, you need to check this box and fill out Form 940, Schedule A. Currently, only the Virgin Islands apply.

d. Part 2 is where you do the math, reporting how much you paid your employees in wages, the tax owed on those wages (6.0%), and payments that are exempt from being taxed.

e. In Part 3, you modify the FUTA rate of 6.0% by applying your state credit reduction.

f. Here’s where you report how much FUTA you’ve already paid over the course of the year, and how much you still have left to pay. Once you’ve done the math, if it turns out that you’ve paid more tax than you owe, you can report the fact here.

g. This is a breakdown of how much FUTA tax you owed each quarter of the year.

h. If there’s an employee, tax preparer or other person privy to information on your Form 940, you can put their contact info here. This lets them speak about the contents of the form in case the IRS has any questions.

i. Sign here to certify that everything on the form is, to your knowledge, true.

j. This section is only used by your tax preparer or accountant, in the event they’re filing Form 940 on your behalf.

Filing Form 940 online

The easiest way to file Form 940 is to use e-file. Learn more about how to file your small business tax return online.

Form 940 filing deadline

In most cases, Form 940 has to be filed by January 31, 2024. However, if you’re 100% caught up on unemployment taxes, and don’t owe any outstanding amounts, the deadline is pushed to February 10, 2024.

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Unemployment tax is just one of many tax obligations. To keep track of every tax deadline—including business income taxes—check out this list of 2024 small business tax deadlines.