How is FUTA tax calculated?

The standard FUTA tax rate is 6% on the first $7,000 of wages paid to each employee during a calendar year. Most employers receive a credit of up to 5.4% when they pay their state unemployment taxes on time. This credit reduces their effective federal rate to 0.6%. The employer stops paying FUTA tax on an employee's wages until the following year after an employee’s earnings exceed $7,000 a year.

When is FUTA tax due?

Employers must report their FUTA tax liability, the amount they must pay in taxes, by filing Form 940 annually. January 31 of the following year is the deadline for filing. However, exceptions apply. Employers must make quarterly FUTA deposits if their liability exceeds $500 in any quarter. Payments are typically due by the last day of the month after the quarter ends. If your FUTA tax liability is $500 or less that quarter, that amount is added to the next quarter's liability. Employers only need to pay FUTA tax when the amount they owe exceeds $500.

What is credit reduction?

Some states borrow from the federal government to fund unemployment benefits through State Unemployment Insurance (SUI). If a state doesn’t repay its loan within two years, employers' FUTA tax credit may be reduced, meaning they'll need to pay more. Employers' FUTA tax rate increases by 0.3% for every year of non-payment.

How does FUTA tax impact employers?

FUTA tax directly impacts your company's employment costs, because the amount employers have to pay increases as you hire more. Additionally, operating in multiple or credit-reduction states can increase your FUTA tax burden and compliance requirements.