Federal Unemployment Tax Act (FUTA)

How does FUTA fit the U.S. unemployment system?

FUTA is the federal part of a U.S. unemployment insurance system that also depends on state taxes. The IRS says only employers pay FUTA: it is an employer cost, not an amount withheld from an employee’s wages. A business with covered employees may therefore have both a federal FUTA obligation and a separate state unemployment tax obligation.

The two payments serve different functions. According to the U.S. Department of Labor, FUTA revenue supports administration of state unemployment insurance and employment services, half the cost of extended benefits, and a fund from which states may borrow. State unemployment contributions primarily finance regular benefits for eligible unemployed workers. Paying FUTA does not trace an employer’s contribution to a particular former employee’s benefit claim; eligibility is decided under the applicable state program.

For a payroll check, record FUTA as an employer-paid federal tax and keep the state unemployment obligation identifiable under the relevant state rules. Eligible state unemployment tax payments can reduce the federal FUTA calculation, but the potential credit does not turn the two obligations into one payment. If FUTA appears as a deduction from an employee’s paycheck, review the payroll setup against the IRS rule.

Who must pay FUTA tax?

The coverage test depends on the type of employer and employment. Ordinary businesses can meet either of two general tests; household and agricultural employers have different thresholds. After establishing employer coverage, identify which workers and payments are subject to FUTA.

The general employer coverage test

For ordinary non-household, nonfarm employment in 2026, a business is generally subject to FUTA if it meets either of these IRS tests in 2025 or 2026:

• It paid at least $1,500 in employee wages during any calendar quarter; or
• It had at least one employee for part of a day in 20 or more different weeks. The weeks need not be consecutive.

The second route counts full-time, part-time, and temporary employees. For example, a seasonal employee who works part of a day in 20 different weeks can bring the employer within the general FUTA test even if the business never pays $1,500 in wages in a single quarter. The worker must actually be an employee for this purpose; a partner of a partnership does not count as its employee under the general test.

These are tests of whether the employer enters the FUTA system. The $1,500 figure measures wages in a quarter across employees; it is separate from the $7,000 annual wage base used to calculate tax for each employee. Meeting a coverage test also does not mean a deposit is due each quarter: the deposit decision depends on whether accumulated undeposited FUTA liability exceeds $500 at quarter end.

Household, agricultural, and exempt employers

Household and farm employment have their own coverage thresholds. Employer exemptions and excluded payments are separate questions: reaching a threshold does not make every wage payment taxable.

Household and agricultural tests

For 2026, a household employer meets the FUTA coverage test if it paid at least $1,000 in total cash wages to household employees in any calendar quarter of 2025 or 2026. That is the combined amount paid to household employees, not a threshold for each worker. Someone employing a nanny should start with this test and the IRS household-employer guidance, which generally routes household FUTA reporting through Schedule H. An employer already filing certain business or farm employment returns may have an alternative reporting route under the IRS rules.

A farm employer has a different either-or test: in any calendar quarter of 2025 or 2026, it paid at least $20,000 in cash wages to farmworkers, or it employed 10 or more farmworkers for part of a day in 20 different weeks in either year. A farm should check both routes, then separately check which wages are taxable. For example, the IRS counts H-2A workers’ wages toward the farm employer test while exempting those wages from FUTA tax.

Caption: U.S. federal 2026 employer tests use the current or preceding calendar year and alternative conditions where shown. Meeting a test does not make every worker or payment taxable; household filing generally follows Schedule H. IRS: Publication 15 (2026), FUTA tests · IRS: Publication 926 (2026), household employers

Entity and payment exclusions

A “nonprofit” label alone does not settle FUTA status. Organizations described in section 501(c)(3) and exempt under section 501(a) generally are outside FUTA, according to the IRS Form 940 instructions. But an otherwise exempt organization can owe FUTA when it pays wages for work for a non-501(c)(3) organization. Check the actual tax status and whose services the wages cover before treating the employer as exempt.

Services for state or local governments are exempt. Tribal-government employment has a conditional exemption tied to participation in, and compliance with, the state unemployment system for the full year; tribal status alone does not settle it. These are specific rules, not a blanket exemption for every public or tax-exempt employer.

An employer that meets a coverage test should separate total employee payments from payments exempt from FUTA. The Form 940 instructions identify categories that can qualify, including certain fringe benefits, group-term life insurance, retirement payments, and dependent-care benefits. The treatment depends on the payment and its statutory conditions; a category name is not enough to exclude every payment in it. Household employers should also check the IRS rules for payments to family members rather than assume a relative’s wages are always taxable or always exempt.

Employees, independent contractors, and classification

FUTA applies to covered employee wages; payments to a genuinely independent contractor are outside that wage category. An invoice, a contractor agreement, or Form 1099-NEC does not by itself establish that status. The IRS examines the actual working relationship, including evidence of the business’s control over the work and the worker’s independence. A business that misclassifies an employee can remain liable for employment taxes.

Suppose a company regularly pays a worker by invoice and plans to leave those payments out of its FUTA wage calculation. It should check the worker’s actual status under federal tax rules, rather than rely on the invoice format or tax form. If the person is an employee, the business must assess whether the wages are covered and whether a specific exclusion applies; if the person is genuinely self-employed, the payments are not employee wages for FUTA. State unemployment agencies may use their own classification rules, so the federal tax conclusion should not be treated as a state UI ruling.

How is FUTA tax calculated?

The federal calculation starts with FUTA-taxable employee wages. Apply the gross rate to those wages, then determine the allowed state unemployment credit and any credit-reduction adjustment. The often-quoted 0.6% result depends on those later checks; it is not the starting rate for every employer.

Taxable wages and the annual $7,000 wage base

For 2026, the gross FUTA rate is 6% on the first $7,000 of FUTA wages paid to each employee in the calendar year. The cap applies separately to each employee and resets with the calendar year. It does not restart with each payroll run or quarter; quarters matter later when an employer checks whether a tax deposit is due.

To find the wages subject to that cap, begin with employee payments, remove amounts that qualify for a FUTA exemption, and then exclude the amount above $7,000 for each employee. The Form 940 instructions distinguish these steps. For example, a payment is not excluded merely because it is called a fringe benefit or retirement contribution; its particular exemption conditions must apply.

Suppose one employee has $10,000 in otherwise FUTA-taxable wages for the year and another has $5,000. Before state credits, the first generates $420 of gross FUTA tax ($7,000 × 6%); the second generates $300 ($5,000 × 6%). Only if the employer qualifies for the full 5.4% state credit with no applicable reduction would those federal amounts fall to $42 and $30.

A business acquisition can complicate the apparent reset of an employee’s wage base. Under the IRS successor-employer rules, a qualifying successor may count wages the predecessor paid to continuing employees toward the same annual $7,000 cap if the predecessor was a FUTA employer required to file Form 940. Check those conditions before treating the successor’s first paycheck as the start of a fresh cap.

The state tax credit and credit reductions

The state unemployment tax credit can lower the gross 6% FUTA amount. The allowed credit depends on the employer’s state-tax treatment and the applicable year; a credit reduction can increase the federal amount owed.

When the credit can reduce the 6% rate

The maximum federal credit is 5.4% of FUTA-taxable wages. To receive the full credit, an employer generally must pay its state unemployment tax in full and on time on the same wages subject to FUTA, with no applicable credit reduction. Subtracting the full 5.4 percentage points from 6% yields a 0.6% federal rate: on $7,000 of taxable wages, that is $42 rather than the $420 gross amount. The prior example’s $30 result on $5,000 uses the same full-credit assumption.

The 5.4% figure is the maximum federal credit, not a statement that every employer’s state unemployment contribution rate is 5.4%. Nor does a state experience rate of zero automatically rule the credit in or out. The Form 940 instructions distinguish a zero rate assigned to wages still subject to state unemployment tax from wages excluded from that tax. An employer should check its state-tax facts against the credit rules before using 0.6% in a forecast or return.

How a credit-reduction state changes the result

States can borrow from the federal government for their unemployment systems. If qualifying advances remain outstanding, the state may become a FUTA credit-reduction state. The employer’s otherwise available federal credit is reduced for affected wages, which raises its federal FUTA amount; the ordinary 0.6% example then understates the result. Employers with wages in a credit-reduction state use Form 940 Schedule A to determine the additional tax.

As of October 23, 2026, the Department of Labor’s 2026 list is potential: its final annual determination is made after the November 10 repayment deadline. Before treating a state as subject to a 2026 reduction or using a state-specific amount, check the Department’s final annual table and the applicable Form 940 Schedule A. An early potential list is not a final rate.

Caption: U.S. federal 2026 sequence. The $7,000 base applies per employee per calendar year. A 5.4% maximum credit, and thus a 0.6% result, depends on the employer's facts; check the final annual credit-reduction determination. IRS: Publication 15 (2026), FUTA rate and wage base · IRS: Final Form 940 instructions, taxable payments and credit · U.S. DOL: FUTA credit reductions

When are FUTA deposits and Form 940 due?

Calculating FUTA, depositing it, and filing the annual return are separate steps. A covered employer can owe tax for the year without crossing the threshold for a deposit in every quarter. The rules below describe the ordinary Form 940 route; household employers generally use Schedule H.

The annual return and conditional quarterly deposits

Most covered employers report FUTA on annual Form 940. Whether they must deposit during the year depends on their accumulated undeposited FUTA liability at each quarter’s end, not simply on having employees or meeting the FUTA coverage test. Under the IRS deposit rule, a balance of $500 or less carries into the next quarter. Once that balance is more than $500, the employer generally deposits it electronically by the last day of the following month.

For example, suppose an employer has $300 of undeposited liability after the first quarter and adds $180 in the second. The $480 balance carries forward. If the third quarter adds $70, the accumulated $550 exceeds the threshold, so the employer must deposit it by the following month’s deadline. The annual Form 940 still reports the year’s FUTA tax; the deposit addresses when money must be sent during the year.

The general Form 940 filing deadline is January 31 after the tax year. If the employer made all required deposits on time, it may file by February 10. When a deadline falls on a Saturday, Sunday, or legal holiday, it moves to the next business day. Check the final instructions for the relevant tax year before setting a calendar date.

Caption: Ordinary U.S. Form 940 deposit route. The trigger is more than $500 of accumulated undeposited liability; $500 or less carries forward. Form 940 remains annual, and household Schedule H rules differ. IRS: Topic 759, Form 940 and FUTA deposits · IRS: Publication 15 (2026), FUTA deposits

Multi-state, amended, final, and successor returns

Form 940 needs an additional state breakdown if the employer paid state unemployment tax in more than one state or paid wages in a credit-reduction state. In either case, the IRS requires Schedule A. It supports the federal state-by-state calculation; it does not make state unemployment rates uniform or replace obligations to the relevant state agencies.

If a filed Form 940 needs correction, use the form for the year being corrected, mark it as amended, enter the corrected amounts, and explain the change. A return is marked final when the business closed or stopped paying wages and will not have FUTA liability in the future. The IRS Form 940 instructions distinguish those cases; a temporary pause in payroll alone is not a reason to mark a return final.

After an acquisition, check the predecessor’s FUTA status and identify employees who continued working before resetting the annual wage base. A qualifying successor that acquired substantially all of a business or business unit and immediately employed a predecessor employee may count wages the predecessor paid that employee earlier in the calendar year toward the $7,000 base, if the predecessor was a FUTA employer required to file Form 940. In the IRS example, $5,000 paid by the predecessor plus $3,000 paid by the successor puts $1,000 above the cap; assuming those payments are otherwise taxable, only $2,000 of the successor’s $3,000 falls within the annual base. The rule depends on the acquisition and filing facts, so a payroll-provider change alone is no proof of successor treatment.

How does FUTA differ from state unemployment tax and FICA?

These are separate payroll obligations with different funding purposes and wage bases. The U.S. Department of Labor distinguishes the federal and state sides of unemployment insurance; FICA funds Social Security and Medicare instead. The federal wage bases below come from the IRS 2026 employer guide.

Tax	Who pays	What it supports	Wage base and reporting
FUTA	Employer only; no employee withholding	Administration of unemployment and employment services, part of extended benefits, and state borrowing capacity	In 2026, the first $7,000 of covered wages per employee per calendar year; generally reported federally to the IRS on Form 940
State unemployment tax (state UI or SUTA)	Usually the employer; some states also require employee contributions	Regular unemployment benefits for eligible workers under the state program	Rate, taxable wage base, and reporting rules depend on the state; the state unemployment agency administers them
FICA	Employer and employee shares	Social Security and Medicare	In 2026, Social Security has a $184,500 wage base; Medicare has no wage-base limit. These federal taxes are reported to the IRS separately from FUTA.

For a payroll ledger, keep FUTA as a federal employer expense, state UI under the applicable state account, and FICA with its employer and employee components. State UI payments can qualify for a credit against FUTA, so they affect the federal calculation, but they do not discharge the federal obligation. The employer’s state contribution rate is also different from the maximum federal FUTA credit percentage. State rules vary, including whether employees contribute, so check the relevant state agency before setting the state-side payroll entry.

What changes for cross-border teams or outsourced payroll?

Two checks matter when a team spans countries or uses a payroll provider: whether the employee’s wages fall within U.S. FUTA, and which employer or authorized third party files the U.S. return. A worker’s location and a vendor’s description of its service do not settle those questions by themselves.

U.S. employees working abroad or for foreign employers

Work outside the United States does not automatically remove FUTA. The IRS says wages of a U.S. citizen working abroad are generally subject to FUTA when the worker has an American employer as defined by the IRS. A U.S. citizen working in Germany for a U.S.-organized corporation therefore calls for a FUTA scope review. The worker’s citizenship, employer identity, covered employment, and any exemption still need checking; that example says nothing about German payroll law.

The IRS generally treats a resident alien’s wages for work abroad as exempt from FUTA, with a qualification for work on an American vessel or aircraft. For a nonresident alien, the place where services are performed is generally decisive: work outside the United States is outside FUTA, while U.S.-performed services can bring wages into scope, subject to the applicable exceptions. Applying the U.S.-citizen rule to every internationally based employee would miss these distinctions.

A foreign employer also cannot infer FUTA treatment from its place of incorporation alone. Under the IRS foreign-employer guidance, wages for services performed in the United States by a citizen, resident alien, or nonresident alien generally are subject to FUTA unless an exemption applies. Wages for services performed outside the United States for a foreign employer are not subject to FUTA. Before leaving cross-border wages out of the calculation, identify the worker’s U.S. tax status, where the services were performed, the employer’s status, and any specific exemption. This FUTA review does not decide income tax, immigration, or another country’s social-insurance treatment.

Outsourced payroll, PEOs, and the Form 940 filer

A payroll company’s promise to “handle payroll” does not tell an employer who files Form 940 or whose EIN appears on it. The IRS distinguishes several third-party arrangements, and their FUTA filing routes differ.

A payroll service provider may prepare and file a separate Form 940 under each client employer’s EIN, depending on its services. A reporting agent authorized through Form 8655 also files separate client-EIN returns. In both cases, the client employer retains its federal employment-tax duties and liability; sending payroll data or deposits through the provider does not transfer them.

An ordinary section 3504 agent may have authority for federal income-tax withholding and Social Security and Medicare tax functions, but that designation generally does not extend to FUTA. A general Form 2678 approval or authority to file aggregate Form 941 therefore does not establish authority to file aggregate Form 940. The IRS recognizes a narrow FUTA exception for section 3504 agents it has approved for home-care service recipients; this is not a general household-employer or PEO rule.

For compensation an IRS-certified CPEO pays to covered workers under a qualifying CPEO contract, it is generally treated as the employer for federal employment taxes and files aggregate Form 940 under its own EIN, generally with Schedule R. That treatment does not automatically cover every worker or customer-paid wage, and a customer can remain an employer for particular workers or facts. The Form 940 instructions also identify an “Other Third Party” aggregate-filer category, with a non-certified PEO as an example. That checkbox identifies a filer; it does not itself grant aggregate-filing authority or transfer FUTA liability.

Caption: U.S. federal filing routes depend on the actual IRS arrangement, authorization, contract, and covered wages. A Form 940 'Other Third Party' checkbox does not itself establish aggregate-filing authority or transfer liability. IRS: Third-party arrangements · IRS: Final Form 940 instructions, aggregate filers · IRS: Form 940 Schedule R and section 3504

Before relying on a third party, confirm the actual IRS arrangement and authorization or contract, the legal Form 940 filer and EIN, which workers and wages it covers, whether an aggregate return needs Schedule R, and evidence that deposits were made. Those records answer the FUTA question more reliably than a provider label. For the wider PEO filing workflow, see 4dev.com’s PEO payroll-tax filing guide.