Federal Payroll Taxes 101: Federal Unemployment Tax Act (FUTA)

Your business is required to meet a range of employer payroll tax responsibilities, and the Federal Unemployment Tax Act (FUTA) is one of the most important. While sometimes overshadowed by income and FICA taxes, FUTA plays a central role in funding unemployment benefits, and it must be carefully managed to avoid noncompliance and costly penalties.

FUTA compliance, along with state unemployment tax (SUTA) obligations, can be particularly complex for employers with growing workforces or teams across multiple states. In this article, we’ll explain how FUTA works, how it connects with your state tax responsibilities, and the practical steps you can take to stay compliant.

What is FUTA: Federal Unemployment Tax Act

The Federal Unemployment Tax Act (FUTA) is a federal tax paid solely by employers to support unemployment insurance. It is designed to fund unemployment benefits for eligible workers who lose their jobs for reasons beyond their control—such as layoffs or business closures—making it an important part of your ongoing employer payroll tax responsibilities.

FUTA also plays a stabilizing role in the broader unemployment system, working alongside the State Unemployment Tax Act (SUTA) to fund benefits, cover administrative costs, and provide loans to states when needed.

What Does FUTA Fund?

FUTA supports both federal and state unemployment insurance systems. It works in conjunction with state-level programs governed by State Unemployment Tax Acts (SUTA) and helps fund the following:

• Extended Federal Unemployment Benefits: During times of high unemployment, FUTA helps provide extended benefits to individuals who have exhausted state benefits.
• State Program Administration: Significant FUTA revenue supports the administrative costs associated with state unemployment insurance (UI) programs. These funds enable states to manage their own UI benefit structures and operate public employment services, such as job placement assistance and labor exchange programs.
• Loans to States: If a state’s UI trust fund runs low, it may borrow FUTA funds to maintain benefit payments. If the loan is not repaid within a specific timeframe, the state becomes a FUTA credit reduction state. Employers in these states will receive a reduced FUTA tax credit, resulting in a higher FUTA costs for employers.

Employer-Only FUTA Tax Responsibility

FUTA taxes are paid exclusively by the employer. That means no portion is withheld from employee wages and employers are solely responsible for calculating, reporting, and remitting FUTA tax payments.

While most employers are subject to FUTA tax requirements, some exemptions may apply for certain nonprofits or employers with limited staffing. Still, for most businesses, FUTA remains a key part of their employer payroll tax responsibilities.

FUTA Rate for Employers and Wage Base (as of 2025)

FUTA tax liability is calculated using two main components: the statutory tax rate and the wage base limit (the maximum amount of an employee’s annual wages subject to FUTA tax). Once wages exceed this threshold, no additional FUTA is owed for that employee during the year. See the chart below for more details.  

How SUTA Compliance Can Reduce FUTA Tax Liability

Employers may qualify for a credit against their FUTA liability by making timely and full payments into their state’s unemployment insurance system under the State Unemployment Tax Act (SUTA). This credit can be as high as 5.4%, reducing the gross FUTA tax rate from 6.0% to 0.6%. Because the savings are so substantial, keeping up with SUTA compliance is one of the most effective ways to manage your overall federal payroll tax costs.

To remain eligible for the maximum credit, you must pay SUTA taxes promptly and in full. Failing to meet state tax obligations may result in a partial or complete forfeiture of the FUTA credit, increasing your overall FUTA tax burden.

Impact of State Trust Fund Solvency on FUTA Credit

A state’s unemployment trust fund can also impact an employer’s ability to claim the full FUTA credit. A state with an outstanding federal loan—typically borrowed during economic downturns—may be designated a FUTA credit reduction state.

In such cases, the U.S. Department of Labor reduces the FUTA credit in the state by at least 0.3% for each year the loan remains unpaid as of January 1. Consequently, employers in these states incur higher FUTA tax liabilities, which increase the longer the loan remains outstanding.

Businesses in chronically indebted states may face an additional Benefit Cost Rate (BCR) add-on, which further raises the FUTA rate for employers in those states. This structure incentivizes states to maintain solvent unemployment insurance trust funds to avoid imposing increased tax liabilities on in-state employers.

FUTA Credit Reduction States (as of 2025)

Each year, the Department of Labor (DOL) publishes a list of the FUTA credit reduction states. The chart below shows the list as of July 2025, with common recent rates for prior years and early 2025 estimates. Rates may be subject to further DOL updates in late 2025. Verify the exact, final rates from official DOL publications.

FUTA vs. SUTA: Understanding the Difference

While both the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) serve to fund unemployment insurance programs, each has its own funding source and scope of responsibility.

• FUTA is a federally mandated payroll tax—paid by employers—to support national unemployment initiatives and to supplement state programs during economic downturns.
• SUTA is a state-administered payroll tax—typically employer-paid with a few states requiring employee contributions—that finances each state’s unemployment insurance (UI) program. Established alongside FUTA in 1939, SUTA provides localized unemployment benefits and supports programs such as state-level job placement services.

Key FUTA Takeaways for SMBs

When you stay current with FUTA and SUTA, you avoid penalties and may qualify for credits that lower your federal payroll tax liability. Here are the key FUTA takeaways to keep top of mind:

1. FUTA is an employer-only tax—no portion is withheld from employee wages.
2. FUTA applies to most employers, with limited exemptions.
3. The standard FUTA tax rate is 6.0% on the first $7,000 of each employee’s annual wages. Paying your state unemployment taxes (SUTA) on time and in full may qualify for a credit of up to 5.4%, reducing your effective FUTA rate to 0.6%.
4. Being an employer in a credit reduction state means a reduced FUTA credit, which can increase your effective federal unemployment tax liability.
5. Timely reporting and deposits are essential to maintaining compliance.
6. Remote employees can trigger multistate liability.
7. Professional support can help reduce your risk of noncompliance.