FUTA (Federal Unemployment Tax)

FUTA is 6.0% on the first $7,000 of each employee's wages, but most employers receive a 5.4% credit for paying state unemployment tax (SUTA), bringing the effective rate to 0.6%.

FUTA is reported annually on Form 940. State unemployment is reported separately on state-specific quarterly forms.

Employer-only. Unlike FICA, FUTA is not shared with employees and cannot be withheld from paychecks. The tax stops accumulating for each employee at the $7,000 wage base — so a $100k employee costs the employer $42/year in FUTA (0.6% × $7,000), the same as a $20k employee. This is why FUTA barely registers as a cost concern for the payroll department once wages exceed the base.

Deposit timing matters even when the amount is small. FUTA is owed quarterly if the accumulated liability exceeds $500; otherwise annually with the Form 940. Missing a quarterly deposit triggers a small penalty and interest but also flags the account for closer scrutiny of other payroll deposits. Most payroll systems handle this automatically.

State-level SUTA (State Unemployment Tax) is the material payroll tax alongside FUTA. Rates vary from ~0.5% to 6%+ depending on the state and the employer's experience rating (higher-turnover employers pay more). New-employer rates are set by default until the employer builds up an experience history over 2-3 years. Managing SUTA effectively means paying attention to layoffs, contested unemployment claims, and voluntary quits vs terminations — each affects the experience rating and future SUTA cost.

The FUTA credit reduction is the risk to plan for. When a state has an outstanding federal unemployment-loan balance for multiple years (California has been in this position historically), employers in that state lose some of the 5.4% credit — FUTA effective rate rises from 0.6% to 0.9%, 1.2%, or higher. The IRS lists credit-reduction states each November for the following year; check before finalizing payroll budget.