Running a business isn’t just about paying your team—it also means handling the taxes that keep everything running. One of those is the Federal Unemployment Tax Act (FUTA), which funds unemployment benefits. If your business pays $1,500 or more in wages to any employee in a single quarter, FUTA applies.
In this guide, we’ll dive into what FUTA is, its differences from other payroll taxes, and the steps to calculate it yourself.
What’s FUTA?
FUTA is a federal payroll tax that funds unemployment insurance and job service programs nationwide. Employers contribute 6% of the first $7,000 of each worker’s wages. Congress set this threshold in 1983, though it could change in the future. The federal government then uses those funds to oversee and support state unemployment systems.
Who pays FUTA tax?
Not every employer has to pay FUTA. Nonprofits with 501(c)(3) status, along with churches, mosques, and synagogues, are exempt. Tribal governments are also excluded, as are federal and state agencies—including public schools.
For most other employers, the rule is straightforward: if you pay more than $1,500 in wages during any quarter, FUTA applies. That means many typical jobs and industries fall under this requirement. Here are a couple of examples:
- Agricultural employers: Those in the agriculture sector, like farms, must pay FUTA taxes if they have paid at least $20,000 in wages during any calendar quarter or if they have employed 10 or more farm workers on any day of each week for at least 20 weeks in a year.
- Household employers: Individuals employing domestic help, such as housekeepers or nannies, must also pay FUTA taxes if they pay these employees $1,000 or more in wages within a quarter.
- Seasonal or part-time employers: Businesses that hire temporary or part-time staff may still owe FUTA if wages cross the $1,500 threshold in any quarter, even if the workers are not year-round.
FUTA vs. SUTA: What’s the difference?
Both FUTA and the State Unemployment Tax Act (SUTA) serve the same purpose: they provide a safety net for employees who lose work. The main difference is that FUTA is federal, while SUTA is state-based. Employers pay SUTA directly to their state, and those funds cover unemployment benefits for workers who are out of a job through no fault of their own. Unlike FUTA’s flat federal rate, SUTA rates and wages vary widely by state. Your industry, how long you’ve been in business, and your history of employee turnover can all affect the rate you pay. For example, newer companies or those with a history of frequent layoffs often pay higher rates.
States also review and update their SUTA rates regularly, so it’s important for employers to keep track of changes year-over-year.
FUTA vs. FICA: What’s the difference?
Although the Federal Insurance Contributions Act (FICA) and FUTA are both parts of the U.S. tax system, they’re quite different. FICA is the payroll tax that funds both Social Security and Medicare. Lawmakers first introduced it in 1935 to support retirees and expanded it in 1965 to add Medicare coverage for older Americans. Today, FICA equals 15.3% of wages, split evenly between employers and workers. Employees contribute 6.2% to Social Security and 1.45% to Medicare, while organizations match those same amounts. Together, these contributions keep federal benefits flowing to retirees, people with disabilities, and qualifying family members.
Every employee’s Social Security number tracks these payments and translates them into credits. Over time, those credits determine eligibility for Social Security and Medicare benefits, including retirement, disability, and survivor. For employers, it’s another compliance box to check—and a reminder that payroll accuracy is essential.
How to calculate FICA tax
Calculating FUTA is straightforward once you break it down. First, determine each employee’s taxable wages, apply the FUTA rate, and total the amounts. Finally, you can adjust for credits. Here’s how it looks in practice.
Calculate taxable wages
- For employee A, the taxable amount is $7,000 (since $7,000 is the cap)
- For employee B, the taxable amount is $5,000 (since they earn less than the $7,000 cap)
Apply the FUTA tax rate (6%):
- For employee A, 6% of $7,000 = $420
- For employee B: 6% of $5,000 = $300
Find the total before credits
- Total FUTA tax liability is $420 + $300 = $720
Adjust for credits
- With the full 5.4% SUTA credit, the FUTA rate drops to 0.6%.
- For employee A, the new FUTA tax is 0.6% of $7,000 = $42
- For employee B, it’s 0.6% of $5,000 = $30
Total FUTA liability = $72.
Streamline processes and avoid risks with Oyster
Navigating unemployment taxes across multiple countries can be overwhelming, with every region adding its own payroll, tax, and compliance hurdles. Oyster streamlines the process by integrating global payroll into one platform that ensures FUTA and broader compliance in 180+ countries.
With the right expertise and intuitive tools, Oyster helps you stay compliant, avoid penalties, and grow your team across borders with confidence.
Stay compliant worldwide—discover Oyster’s Global Payroll today.
FAQs
How much is FUTA tax in the U.S.?
The FUTA tax rate is 6% on the first $7,000 of each employee’s wages per year. In most cases, employers may claim a credit of up to 5.4% if they also pay state unemployment taxes. This usually brings the effective rate down to 0.6%.
Where does FUTA come from?
FUTA stands for the Federal Unemployment Tax Act. It’s a federal law that requires employers—not employees—to pay into a fund that supports unemployment benefits.
When was FUTA enacted?
Congress passed FUTA in 1939, and it became effective in 1940. It was part of a broader effort to strengthen unemployment insurance after the Great Depression.
Why was FUTA created?
FUTA was designed to provide financial support for workers who lose their jobs. The tax funds state workforce agencies, which then help unemployed workers with benefits, job training, and career services.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
