The Federal Unemployment Tax Act (FUTA) is a U.S. federal law that provides funding for state unemployment insurance (UI) programs. Employers are responsible for paying FUTA taxes, which help states cover unemployment benefits for eligible workers who lose their jobs through no fault of their own.
FUTA tax is separate from state unemployment taxes and is paid only by employers, not employees. The current federal FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages. However, most employers qualify for a credit of up to 5.4% when they also pay state unemployment taxes on time, reducing the effective FUTA rate to 0.6%.
Employers must report FUTA taxes annually using IRS Form 940. Payments may be required quarterly, depending on the total tax owed. Staying compliant with FUTA is essential to avoid IRS penalties and ensure proper unemployment benefit funding at the federal level.
Employers should monitor their state’s status on FUTA credit reductions, which can increase the total FUTA liability in some states that have outstanding federal loans.
Understanding FUTA helps employers stay compliant with tax laws while contributing to a safety net for displaced workers.
