Federal Unemployment Tax Act (FUTA)

What is Federal Unemployment Tax Act (FUTA)?

The Federal Unemployment Tax Act (FUTA) imposes a payroll tax on employers to help finance unemployment compensation for workers who have lost their jobs. Unlike some other payroll taxes, FUTA is paid entirely by the employer and is not deducted from employee wages.

Why Federal Unemployment Tax Act (FUTA) Matters

The FUTA tax rate applies to the first portion of each employee’s annual wages, up to a set wage base. Employers who also pay state unemployment taxes on time may receive a credit that significantly reduces the effective FUTA rate. Employers report and pay FUTA taxes annually using IRS Form 940, though quarterly deposits may be required if the liability exceeds a certain threshold.