What is Federal Unemployment Tax Act? (FUTA)

FUTA provides funds for unemployment compensation to workers who lose their jobs. It’s a tax paid only by employers. GoCo Embedded Payroll helps calculate and manage FUTA payments for you, unless your company is exempt.

The Federal Unemployment Tax Act (FUTA) is a U.S. federal law that requires employers to pay a federal tax on wages paid to employees. This tax funds unemployment benefits for workers who have lost their jobs.

Here’s a breakdown of how FUTA works and what you need to know as an employer:

Who Pays FUTA?

FUTA is paid entirely by the employer. Employees are not required to pay any part of this tax.

FUTA Tax Rate and Wage Base

• The current FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages per year. This means that once an employee earns more than $7,000 in a calendar year, the employer is no longer required to pay FUTA tax on those earnings.
• Most employers are eligible for a credit of up to 5.4% if they also pay state unemployment taxes. This brings the effective FUTA tax rate down to 0.6% in most cases.

Filing and Payment

Employers must file Form 940 annually to report their FUTA tax liabilities. Payments are generally due by January 31 for the previous year. However, if the tax exceeds $500 in a quarter, payments are required quarterly.

Why is FUTA Important?

The funds collected through FUTA are used to pay unemployment benefits to workers who lose their jobs through no fault of their own. This provides a financial safety net during periods of unemployment, helping to support individuals and stabilize the economy.

Who is Exempt from FUTA?

Some employers and wages are exempt from FUTA, such as:

• Non-profit organizations: (501(c)(3)) are exempt from FUTA but not necessarily exempt from FICA.
• Government entities
• Certain wages paid to family members or agricultural workers, depending on the circumstances. 

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