FUTA Tax Explained: The 0.6% Rate and 5.4% Credit

This article is for general information, not tax or legal advice. FUTA rules, credit reduction states, and deposit thresholds change. Verify current figures with the IRS and your state agency, or talk to a payroll professional before you file.

Here is the line that trips up almost every new employer. The Federal Unemployment Tax Act sets a rate of 6.0%, but the check you actually write is usually for 0.6%. Same tax, wildly different numbers.

That gap is not a typo or a special exemption. It is a built-in credit worth 5.4%, and once you see how it works, FUTA turns into one of the simplest payroll taxes you owe. For most employers the whole thing comes out to $42 per employee for the year.

What FUTA actually is

FUTA stands for the Federal Unemployment Tax Act. It funds the federal side of the unemployment insurance system, the safety net that pays benefits to workers who lose their jobs.

The most important thing to know up front is that FUTA is an employer-only tax. Nothing comes out of your employee’s paycheck for it. You pay it from the business, on top of wages, and your workers never see it on their pay stub.

Most employers owe FUTA if they meet one of two simple tests. You pay it if you paid $1,500 or more in wages in any calendar quarter, or if you had at least one employee for some part of a day in 20 or more different weeks during the year. Household employers and agricultural employers have their own separate tests.

If that describes your business, you file FUTA once a year on Form 940. We will get to that. First, the rate.

The 6.0% headline rate and the $7,000 wage base

The statutory FUTA rate is 6.0%. That is the number written into the law, and it is the figure a lot of guides quote without explaining the rest.

But 6.0% does not apply to all of an employee’s pay. It applies only to the first $7,000 each employee earns in the calendar year. That ceiling is the FUTA wage base, and it has been stuck at $7,000 since 1983.

The wage base does two helpful things. It caps your exposure per employee, and it makes the math the same for nearly everyone. Whether a worker earns $30,000 or $300,000, FUTA only ever touches the first $7,000.

At the full 6.0% rate, that would be $420 per employee per year. Almost no one pays that, though, because of the credit.

The 5.4% credit: how 6.0% becomes 0.6%

This is the part that clears up the confusion. The federal government wants you to fund your state’s unemployment system, so it rewards you for doing exactly that.

When you pay your state unemployment tax (SUTA) in full and on time, you earn a credit of up to 5.4% against your FUTA bill. Subtract that credit from the 6.0% statutory rate and you are left with a net rate of 0.6%.

The arithmetic is worth seeing on one line:

6.0% − 5.4% = 0.6%

Apply that 0.6% to the $7,000 wage base and you get the number every small employer should memorize:

0.6% × $7,000 = $42 per employee per year.

That $42 is the maximum, not an estimate. An employee who earns $7,000 and an employee who earns $700,000 both generate exactly $42 of FUTA, because the tax stops at the wage base either way. Pay your SUTA on schedule and your federal unemployment cost is forty-two dollars a head, full stop.

For a five-person team where everyone clears $7,000, that is $210 for the entire year. FUTA is real, but it is rarely the line item that keeps anyone up at night. The employer FICA match, which we cover in our guide to the employer FICA match, is a much bigger number.

Credit reduction states: when you pay more than 0.6%

One situation breaks the clean 0.6%, and it is worth watching for. It is called a credit reduction.

When a state runs short on money to pay unemployment benefits, it borrows from the federal government. If that loan stays unpaid for too long, the federal government claws back part of the 5.4% credit from employers in that state. You did nothing wrong, but your FUTA bill goes up anyway.

The trigger is specific. If a state has an outstanding federal unemployment loan on January 1 for two consecutive years and has not repaid it by November 10 of the second year, its employers lose 0.3% of the credit. The reduction grows by another 0.3% for each additional year the loan goes unpaid.

For tax year 2025, two jurisdictions are affected:

California: 1.2% credit reduction, which makes the effective FUTA rate 1.8%. That works out to roughly $126 per employee instead of $42.
U.S. Virgin Islands: 4.5% credit reduction, for an effective rate of 5.1%, or about $357 per employee.

Connecticut and New York were on the watch list but repaid their loans before the November 10, 2025 deadline, so they are not reduced for 2025. The final list comes out late in the year, which is why a December surprise catches employers who do not track it. You report any credit reduction on Schedule A of Form 940.

How to calculate and report FUTA: Form 940 and deposit rules

FUTA is filed once a year, but you may have to deposit it during the year. The dividing line is $500.

You track your FUTA liability as wages are paid. As long as your cumulative liability for the year stays at or below $500, you do not have to make a separate deposit. Once it crosses $500, you owe a deposit by electronic funds transfer through EFTPS, due by the last day of the month after the quarter in which you crossed the line.

If your total FUTA for the whole year stays at $500 or less, you can skip the quarterly deposits entirely and just pay it with your annual return. At $42 per employee, a small shop with six or fewer employees often falls under the threshold and pays once.

That annual return is Form 940. It reconciles what you owe for the year and is due January 31. For tax year 2025, the deadline lands on February 2, 2026, because January 31 falls on a weekend. If you had wages in a credit reduction state, you attach Schedule A to calculate the extra amount.

Here is a quick worked example. Say you run payroll for three employees who each earn well over $7,000, in a state with no credit reduction:

FUTA-taxable wages: 3 × $7,000 = $21,000
Net FUTA at 0.6%: $21,000 × 0.6% = $126

Your liability never tops $500, so you make no quarterly deposits and pay the $126 with Form 940 in January.

FUTA vs. SUTA, and how a payroll calculator handles both

It is easy to blur FUTA and SUTA together, since both are employer-paid unemployment taxes. The cleanest way to keep them straight is this: FUTA is federal and goes to the IRS, SUTA is state and goes to your state agency.

They are linked by the credit. Your 5.4% FUTA credit exists because you paid SUTA, so the two taxes are not really independent. Fall behind on your state payments and you can lose part of the federal credit, the same penalty a credit reduction state imposes on its whole roster of employers.

SUTA is also the more variable of the pair. Your state sets the rate based on your industry and your history of unemployment claims, and each state has its own wage base, often much higher than FUTA’s $7,000. So while FUTA is a flat $42 per head for most employers, SUTA can swing widely from one business to the next.

The mechanical headache is the wage base cutoff. FUTA stops at $7,000 per employee, and that cap has to truncate on the exact dollar, mid-paycheck, when a worker crosses it during the year. Add the per-employee tracking, multiply it across a team, and a spreadsheet starts dropping cents or taxing wages it should have stopped taxing.

That is the kind of bookkeeping WorkLogs44 is built for. It carries a per-payroll FUTA rate that defaults to 0.006 and stays editable for credit reduction states, and it tracks each person’s FUTA and SUTA year-to-date so the $7,000 cap shuts off automatically when their wages cross it. Every employee is calculated independently, decimal-precise, across all 50 states plus DC.

Frequently Asked Questions

What is the FUTA tax rate for 2026?

The gross FUTA rate is 6.0% on the first $7,000 of each employee’s wages. Most employers qualify for the full 5.4% state credit, which drops the net rate to 0.6%.

Why do employers pay 0.6% instead of 6.0%?

Employers who pay their state unemployment tax (SUTA) in full and on time earn a credit of up to 5.4% against the 6.0% federal rate. That credit leaves a net FUTA rate of 0.6%.

How much is FUTA per employee per year?

At the full credit, FUTA costs $42 per employee per year. That is 0.6% of the $7,000 wage base, and it is the maximum no matter how much more the employee earns.

What is the FUTA wage base?

The FUTA wage base is $7,000 per employee per calendar year. FUTA applies only to the first $7,000 each employee earns, and the base has not changed since 1983.

What is a FUTA credit reduction state, and which states are affected for 2025?

A credit reduction state is one that borrowed from the federal government to pay unemployment benefits and did not repay on time, so its employers lose part of the 5.4% credit. For 2025, California (1.2% reduction) and the U.S. Virgin Islands (4.5% reduction) are affected.

Do employees pay any FUTA tax?

No. FUTA is paid entirely by the employer. Nothing is withheld from the employee’s paycheck for FUTA, unlike Social Security and Medicare, which are split between worker and employer.

When do I have to deposit FUTA tax?

You must deposit FUTA by electronic funds transfer once your cumulative liability for the year passes $500. The deposit is due by the last day of the month after the quarter ends. If your total stays at or below $500, you can pay it with Form 940 by January 31.

What’s the difference between FUTA and SUTA?

FUTA is the federal unemployment tax paid to the IRS; SUTA is the state unemployment tax paid to your state. Paying SUTA in full and on time is what earns you the 5.4% credit that lowers FUTA to 0.6%.

Want to stop hand-checking the $7,000 cap for every employee? Get WorkLogs44 and run federal, state, FICA, FUTA, and SUTA for your whole team in one pass.