FUTA stands for the Federal Unemployment Tax Act, a U.S. federal law requiring employers to pay a payroll tax that funds unemployment benefits for workers who are out of work. This employer-only tax works alongside state unemployment taxes (SUTA) to support workforce stability nationwide.
What is FUTA
Who pays FUTA tax
2025 FUTA tax rate
How to calculate FUTA tax liability
How does FUTA impact a contingent workforce
How to ensure accurate FUTA filing
Enacted in 1939, FUTA is a federal law that funds the federal unemployment insurance system. It was created so the federal government could help stabilize unemployment programs across states through funding administration, supporting extended benefits during periods of high unemployment, and helping states that need temporary financing assistance.
As of 2025, FUTA imposes a tax on the first $7,000 of each worker's annual wages, with a standard rate of 6.0%, meaning up to $420 per worker before credits. Employers qualify for a credit of up to 5.4% against this rate if they pay state unemployment taxes on time, dropping the effective rate to 0.6% or $42 per worker.
Only employers pay FUTA and it is not deducted from worker paychecks.
Employers must file FUTA if they paid $1,500+ in wages in any calendar quarter or employed workers for some part of a day in 20+ weeks during the year. Exemptions apply to certain nonprofits, government entities, and agricultural workers under specific conditions.
Report and pay via IRS Form 940 annually, with quarterly deposits required for liabilities over $500.
The FUTA rate and $7,000 wage base remained unchanged for 2024 at 6.0% (0.6% net), with no broad changes into 2026. States like California faced credit reductions in 2024 due to federal loan debts, raising effective rates above 0.6% for those employers.
Tools like payroll software automate this by integrating employee data, real-time wage tracking, tax rules, and state compliance checks into a seamless process, but always verify state compliance for maximum credits.
FUTA does not apply to independent contractors as workers, but it does matter in contingent workforce management when the “contingent” workers are actually employees of a staffing firm, temp agency, or employer of record (EOR). FUTA is an employer-paid unemployment tax, and the legal employer is responsible for it, not the client company or the worker.
As the legal employer, an employer of record (EOR), like TCWGlobal, takes full responsibility for payroll taxes, including calculating, depositing, and filing Form 940 for FUTA on behalf of client companies' workers. This shields clients from direct IRS liability while ensuring compliance with federal unemployment tax rules. Book a 30-minute demo with TCWGlobal to learn how we can ensure you stay compliant with payroll taxes.