1. What is FUTA Tax?

The Federal Unemployment Tax Act (FUTA) tax is a payroll tax paid by employers to fund state workforce agencies. Employers pay 6% on the first $7,000 of wages paid to each employee annually, but can claim a credit of up to 5.4% for paying state unemployment taxes, making the effective rate typically 0.6%.

2. How FUTA Tax is Calculated

The standard FUTA calculation is:

Where:

• 0.06 — Federal FUTA tax rate
• State Credit — Typically 5.4% (0.054), but may be reduced
• $7,000 — Wage base limit per employee

3. Credit Reduction States

States that have borrowed from the federal government to pay unemployment benefits and not repaid may have reduced credits. This increases the effective FUTA rate employers in those states must pay.

4. Using the Calculator

Instructions: Enter total wages subject to FUTA tax, select any applicable credit reduction, and enter number of employees. The calculator will determine taxable wages and compute the FUTA tax.

5. Frequently Asked Questions (FAQ)

Q1: What's the standard FUTA tax rate?
A: The standard rate is 6% on the first $7,000 of wages per employee, but with the maximum 5.4% credit, the effective rate is typically 0.6%.

Q2: When does the credit reduction apply?
A: When a state has outstanding federal unemployment loans for 2+ years and hasn't made sufficient progress in repayment.

Q3: How is the $7,000 wage base applied?
A: It's per employee. Once an employee earns $7,000 in a calendar year, no further FUTA tax is owed for that employee.

Q4: Who pays FUTA tax?
A: Employers pay FUTA tax; it's not deducted from employee wages.

Q5: When is FUTA tax due?
A: Generally quarterly if liability is $500+, with Form 940 filed annually.