Federal Unemployment Tax Act (FUTA)

Definition

FUTA is a federal payroll tax paid entirely by employers (not employees) that funds the federal share of unemployment insurance. The standard FUTA rate is 6.0% on the first $7,000 of each employee's wages per year. Most employers receive a 5.4% credit for paying state unemployment tax (SUTA) on time, reducing the effective FUTA rate to 0.6%.

FUTA is capped — once an employee earns $7,000 in a year, no further FUTA is owed on their wages. For a full-year employee earning above $7,000, the maximum annual FUTA cost is $42 ($7,000 × 0.6%).

In a PEO arrangement, the PEO files Form 940 (Annual FUTA Return) for the co-employed workforce. CPEOs assume sole FUTA liability under SBEA.

Common questions about Federal Unemployment Tax Act (FUTA)

Related terms

• State Unemployment Tax Act (SUTA) — State-level payroll tax that funds each state's unemployment insurance trust fund.
• Federal Insurance Contributions Act (FICA) — The federal law that funds Social Security and Medicare through payroll taxes split between employer and employee.
• Certified Professional Employer Organization (CPEO) — A PEO certified by the IRS, which transfers federal employment tax liability from the client to the PEO.
• Unemployment insurance (UI) — A state-administered program providing partial wage replacement to eligible workers who lose their jobs through no fault of their own.

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