The federal unemployment tax rate is 6% of the first $7,000 you earn each year from each employer

The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax on wages they pay to employees. The federal rate itself is 6%, but most employers pay less because they receive a credit when they pay state unemployment taxes. In practice, the federal portion usually comes to 0.6% after that credit is applied. The tax is calculated on the first $7,000 of each employee's annual wages — so the maximum federal unemployment tax per employee per year is $420 before credits, or about $42 after the credit.

This is an employer tax, not a deduction from your paycheck. You do not see it on your pay stub. The employer sends the money to the U.S. Department of Labor, which holds it in a trust fund that states draw from when they pay unemployment benefits to workers who have lost their jobs.

Key Takeaways

  • The federal unemployment tax rate is 6% on the first $7,000 of annual wages per employee, but employers typically pay only 0.6% after receiving a credit for state unemployment taxes paid.
  • FUTA is an employer-only tax and does not appear on your paycheck or reduce your wages.
  • The money collected funds the federal portion of the unemployment insurance system that states administer.
  • The $7,000 wage base and 6% rate are set by federal law and do not change year to year, though Congress can adjust them.

How the federal rate connects to state unemployment taxes

The federal unemployment tax exists alongside state unemployment taxes, which are separate. Most states charge employers between 0.1% and 5.4% depending on their industry, size, and history of laying off workers. When an employer pays state unemployment tax, the federal government allows them to subtract up to 5.4 percentage points from the 6% federal rate. This is called the FUTA credit.

Because of this credit, an employer in a state with a normal unemployment tax rate will owe roughly 0.6% federal unemployment tax (6% minus the 5.4% credit). However, if a state's unemployment fund becomes depleted and the state borrows from the federal government to pay benefits, the federal credit can be reduced. Employers in those states pay a higher effective federal rate until the state repays the loan.

What the $7,000 wage base means

The wage base is the amount of each employee's annual earnings that is subject to unemployment tax. For federal purposes, this is $7,000 per employee per year. Once an employee has earned $7,000 in a calendar year, no more federal unemployment tax is owed on that employee's wages for the rest of that year.

State unemployment taxes often have different wage bases. Some states tax wages up to $8,000, $9,000, $10,000, or higher. An employer must track both the federal $7,000 limit and the state limit separately, since they are not the same.

The $7,000 federal wage base has been in place since 1983 and does not adjust for inflation. Congress would need to pass new legislation to change it.

Who pays federal unemployment tax

Most employers are required to pay FUTA tax if they pay wages to employees. The main exceptions are certain agricultural employers, household employers (in some cases), and some nonprofit organizations. If you are self-employed, you do not pay FUTA tax — you pay Self-Employment Tax instead, which funds Social Security and Medicare, not unemployment insurance.

A business must pay federal unemployment tax even if it has only one employee. There is no minimum payroll threshold that exempts a small business from the requirement.

How employers report and pay federal unemployment tax

Employers report FUTA tax on Form 941-X (Adjusted Employer's Quarterly Federal Tax Return) or Form 940 (Employer's Annual Federal Unemployment Tax Return), depending on the situation. Form 940 is the standard annual form most employers use. It is due by January 31 of the year following the tax year being reported.

Employers must deposit federal unemployment tax with the IRS throughout the year if the amount owed reaches a certain threshold. The deposit schedule depends on how much tax is owed. Payments are made through the Electronic Federal Tax Payment System (EFTPS) or through a financial institution that accepts federal tax deposits.

If an employer fails to pay FUTA tax on time, the IRS charges penalties and interest. The penalty for late payment is typically 0.5% per month of the unpaid tax.

Why federal unemployment tax exists

The federal unemployment tax funds the administrative costs of the unemployment insurance system and provides a reserve that states can borrow from when their unemployment funds run low. During economic downturns when many workers file for benefits, states may pay out more in benefits than they collect in taxes. The federal fund helps prevent states from running out of money to pay those benefits.

The tax also funds extended unemployment benefits that Congress sometimes authorizes during recessions, and it supports job training and reemployment services in some states.

Frequently Asked Questions

Does the federal unemployment tax rate change every year?

No. The 6% federal rate and the $7,000 wage base are set by law and remain the same each year unless Congress passes new legislation. However, the effective rate an employer pays can change if their state's unemployment fund borrows from the federal government, which reduces the FUTA credit available to employers in that state.

Can I deduct federal unemployment tax from my paycheck?

No. FUTA is an employer tax only. It does not reduce your wages or appear on your pay stub. Your employer pays it separately to the federal government.

What happens if my employer does not pay federal unemployment tax?

The IRS can pursue the employer for unpaid taxes, penalties, and interest. If the employer goes out of business without paying, you may still be able to file for unemployment benefits — the state unemployment system is separate from the employer's tax obligation.

Is federal unemployment tax the same as state unemployment tax?

No. They are two separate taxes. Federal unemployment tax funds the federal portion of the system and is set at 6% (or 0.6% after credits). State unemployment tax rates vary by state and fund the state's benefit payments. Both are employer taxes.

Why is the wage base only $7,000 when people earn more than that?

The $7,000 limit was set in 1983 and has not been updated since then. Congress would need to pass new legislation to raise it. The limit means that high-income employees and employers pay a smaller percentage of total wages into the unemployment system than lower-income workers do.