What is FUTA?
Payroll

What is FUTA? Basics, examples, and calculation

Typically, when you lose your job, you can file for unemployment benefits. These benefits act as a temporary income to support you while you search for a new job or start a business. But where does this money come from? All federal unemployment insurance is funded by a payroll tax called the Federal Unemployment Tax.

We’ll cover the FUTA definition, why it’s important, and how to calculate it. We’ll even give you some tips on how to effectively manage FUTA taxes as a small business owner. Read on to learn all about FUTA or skip to any section using the links below.

What is FUTA?

The federal unemployment tax act (FUTA)

The Federal Unemployment Tax Act (FUTA) establishes a payroll tax that employers must pay, also known as federal unemployment withholdings. However, the tax is applied only to employees, meaning that the tax will only be calculated pertaining to the number of part-time or full-time employees. The revenue made from these payroll taxes then goes toward funding unemployment benefits. Here are a few facts about FUTA:


  • When: Passed in 1939, FUTA provides federal and state governments with money for programs, such as unemployment insurance and employment services. 
  • Why: FUTA was actually a product of the Great Depression, as more than a quarter of all workers in the U.S. were unemployed during the time. Before this, no such safeguards existed in the U.S. 
  • The federal government also enacted the Social Security system to serve as a safeguard against any future financial turmoil.
  • What: FUTA serves as a safety net and factors into the true cost of paying an employee, and helps fund unemployment insurance for those who lose their jobs. 
  • Every employer is responsible for FUTA payments; FUTA is never deducted from an employee’s wages.

How does FUTA work?

As a small business, you’ll likely have to pay into FUTA if you have at least one employee that works at least 20 weeks out of the year and earns $1,500 in any quarter. Some other considerations include:


  • Understand the $7,000 rule: There is a 6% tax on the first $7,000 your employees make each year that counts toward FUTA.
  • FUTA tax credit: As long as you pay your state unemployment taxes each year, your business is eligible for a tax credit of up to 5.4% to offset the 6% tax you pay into FUTA.
  • Quarterly payments: FUTA payments are due quarterly and can result in a fine if not paid on time.
  • Employees are exempt from payment: Employees do not pay into FUTA out of their income—it is the responsibility of the employer alone.

FUTA vs. SUTA

The State Unemployment Tax Act (SUTA) is essentially FUTA on the state level. It’s a payroll tax that many states impose on employers in order to fund state unemployment insurance and other employment programs. Generally, the SUTA tax rate ranges from 2%–5% of each employee’s salary, but it ultimately depends on the state you operate in.

FUTA vs. FICA

Similar to FUTA, the Federal Insurance Contributions Act (FICA) is another federal law mandating an employment tax for businesses. However, just like payroll tax and income tax are different, so are FUTA and FICA.

The main differences between FUTA and FICA lie in their tax rates, contributor responsibility, and the programs they fund.

What programs do FUTA and FICA fund?

FUTA and FICA fund different programs. While revenue from FUTA goes toward unemployment insurance, revenue from FICA goes toward Social Security and Medicare benefits.

How do FUTA and FICA tax rates differ?

FUTA and FICA differ in both payment rates and who pays them. FUTA is paid out by employers to the government whereas FICA is paid by employees. Here’s the full breakdown of the rate difference.

FICA tax rates 

Under FICA, you must withhold 6.2% from your employees’ wages for Social Security, up to a wage cap of $128,400, and your matching amount. You must also withhold 1.45% from your employees’ wages for Medicare, and your matching amount.

FUTA tax rates 

FUTA’s rates are a bit different. Currently, the FUTA tax rate is 6% on the first $7,000 of an employee’s wages in a single year. However, this rate can also be reduced via contributions to state unemployment programs, making the current minimum FUTA rate 0.6%.

Who is responsible for paying FUTA and FICA?

Another factor that distinguishes these two payroll taxes is who pays them. As an employer, under FICA, you must withhold the correct amounts of Social Security and Medicare taxes, then send them to the government. You must also pay your matching share as an employer.

Under FUTA, you must pay taxes to the government to fund state workforce agencies and programs. Employees are not required to pay any FUTA tax. This leaves the breakdown looking like this:

FICA:

  • Employees pay this out of their paycheck, but not directly
  • Employers withhold it from their employees

FUTA:

  • Employers pay for this themselves
  • Employees are not responsible for this payment

FUTA best practices

Futa best practices for your small business Meet filing deadlines Manage unemployment claims in a timely manner Use a payroll service Be selective about who you hire Invest in employee training Approach terminations with care

If you run a small business, it’s important to stay on top of your FUTA taxes. Missing deadlines or making mistakes can result in costly fees that hurt your company’s bottom line. To help you stay in compliance, here are some best practices for handling your FUTA taxes:


  • Meet all filing deadlines: Your company can potentially earn a 5.4% tax credit if you submit SUTA taxes on time. This is a 90% reduction in the FUTA tax and a huge incentive to meet all tax filing deadlines during the year. If you fail to meet due dates, you may face penalties from the IRS.
  • Manage unemployment claims: If your company has a large number of unemployment claims, this can negatively impact your unemployment insurance tax rate, so you should make an effort to respond to unemployment claims in a timely manner. Confirm claimant information for legitimate claims, and report fraudulent claims to the Department of Labor.
  • Use a payroll service: A payroll service can help your small business file payroll taxes on time and stay compliant with the IRS. With QuickBooks Payroll, you can automatically calculate SUTA and FUTA taxes in just a few clicks. This saves you time while minimizing the chances of making errors and, consequently, facing penalties.
  • Be selective when hiring: A high number of unemployment insurance claims from terminated employees can cause a company’s unemployment tax rate to rise. Avoid excessive unemployment insurance claims by hiring the right candidates. Conduct a thorough interview and screening process to ensure you hire capable employees committed to your company.
  • Invest in employee training: If an employee at your company is incompetent, you’ll likely be forced to terminate them and they may file an unemployment insurance claim. Improve employee retention by investing in training and professional development programs for your employees.
  • Approach terminations with care: In some cases, you may have no other choice than to terminate an employee. When this occurs, make sure to handle the situation with care. Consider offering a severance package or outplacement services. This can help limit the number of unemployment benefits a terminated employee applies for and potentially lower your unemployment tax liability.

How do you calculate FUTA taxes?

Calculating FUTA taxes is a fairly straightforward process. If everyone at your company earns more than $7,000 per year, the basic equation for determining FUTA tax in 2023 is as follows:

[$7,000] x [0.06] x [# of employees] = FUTA tax liability

Note: Your equation will differ if you have one or more employees who make less than $7,000. As an employer, it’s important to understand the steps behind the formula, which can be seen below.

FUTA calculation steps

  1. Add up gross wages or salary for each of your employees.
  2. Calculate 6% of the first $7,000 of each employee’s annual income. If you have one or more employees who made less than $7,000, then you’ll calculate 6% of their total wages.
  3. Multiply each employee’s FUTA tax liability by the number of employees at your company. This will give you your total FUTA tax liability. 

Remember this is for full-time employees only—if you have a mixed bag, you’ll need to calculate them separately and combine them. 

Now we’ll look at two quick examples of how one company may calculate FUTA taxes. 

Simple example

Let’s say you run a company with 20 employees.


  • Each employee earns $50,000 per year.
  • With 20 employees, you pay $1 million in annual wages. 

Since everyone makes more than $7,000 per year and FUTA tax only applies to the first $7,000 earned, we can calculate your company’s FUTA tax liability with the following formula:

[$7,000] x [0.06] x [20] = $8,400

Your company’s FUTA tax liability for 2023 would be $8,400. Depending on the state your business is based in, you may also owe state unemployment taxes.

Under $7,000 example

Let’s say you run the same company with 20 employees.


  • Each employee earns $6,000 per year.
  • With 20 employees, you pay $120,000 in annual wages. 

Since everyone makes less than $7,000 per year and FUTA tax only applies to the first $7,000 earned, we can calculate your company’s FUTA tax liability with the following formula:

[$6,000] x [0.06] x [20] = $7,200

Your company’s FUTA tax liability for 2023 would be $7,200. Depending on the state your business is based in, you may also owe state unemployment taxes.

How do you file and pay FUTA taxes?

FUTA payments go through the IRS using the Electronic Federal Tax Payment System (EFTPS), and FUTA tax filings are submitted through Form 940. Details of both processes can be found on the IRS website, but we’ll cover the basics below.

Paying FUTA taxes

First, you’ll want to establish your payment cadence. If your company’s FUTA tax liability comes out to:

  • More than $500 per quarter, you must pay it on a quarterly basis 
  • Less than $500 in a given quarter, carry it over to the next quarter and pay on a bi-quarterly basis 

All payments should be made via the EFTPS, a free tax payment service managed by the U.S. Department of the Treasury.

  1. Visit the EFTPS website
  2. Click “Make a payment”
  3. Follow the steps provided

Make sure to have your EIN, total payment amount, and Social Security number ready when you make a payment.

Filing FUTA taxes

FUTA tax information is filed annually using Form 940 along with your other tax forms. You must file this form if:

  • Your taxable payments to employees met or exceeded $1,500 in any given quarter during the current or previous calendar year.
  • You employ at least one employee who works 20 weeks or more during the current or previous year, regardless if they’re part or full time.

Delivery: You can e-file here or mail Form 940 to the IRS (mailing addresses here).

Deadline: The general deadline for filing Form 940 is January 31. However, if you filed all FUTA taxes on time throughout the year, you can submit the form by February 10. If you choose to mail the form, make sure it’s postmarked on or before February 10. If that date happens to fall on a Saturday, Sunday, or legal holiday, you can file on the next business day without penalty. 

For the most up-to-date tax information, check out our guide covering important terms, tax forms, and dates for 2023. If you’re strapped for time or concerned about filing accuracy, professional tax prep assistance could be a great option.

FUTA frequently asked questions

FUTA has its set of nuances, and while we've covered some basic best practices to keep in mind, you may have some additional questions. See common questions and answers below to help keep you informed. 

What is the FUTA tax rate for 2023?

The standard FUTA tax rate for 2023 remains at 0.6% on the first $7,000 of wages. 

What is the maximum FUTA credit reduction?

The maximum credit reduction you can receive for FUTA is 5.4%, which can lower your FUTA tax expectations from 6% to 0.6%. 

When can employers rollover taxes?

If the payroll liability for FUTA results in $500 or less for the quarter, then you can roll it over to the next quarter.


Enjoy worry-free FUTA tax prep

If you’re a small business owner, calculating payroll taxes and paying FUTA taxes are likely the last things you want to deal with. In some cases, determining your tax liability can be a confusing process. To save time and energy, use QuickBooks Payroll.

QuickBooks Payroll keeps all of your payroll information in one place, so you can easily organize and manage it. Plus, it allows you to calculate and file SUTA and FUTA taxes, helping you stay in compliance and avoid penalties. Free up time to focus on the aspects of your business you’re passionate about and let  QuickBooks Payroll crunch the numbers.


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