Know the employer-only unemployment tax behind Form 940.
FUTA is easy to mix up with FICA because both are federal payroll taxes. The key difference: FUTA is generally an employer-only unemployment tax reported annually on Form 940.
FUTA at a glance
For study purposes, remember the purpose, payer, wage base, rate, and reporting form.
Federal unemployment funding
FUTA works with state unemployment systems to help fund unemployment compensation for workers who lose jobs.
Employer-only tax
Employers pay FUTA. Do not withhold or deduct FUTA tax from employees’ wages.
First $7,000 of wages
FUTA generally applies to the first $7,000 of wages paid to each employee during the year, subject to exceptions and current guidance.
6.0% before state credit
The FUTA tax rate is 6.0%, but employers may receive a credit for state unemployment tax, commonly reducing the net federal rate when requirements are met.
Credit reduction states
A credit reduction can increase FUTA cost for employers in states that have outstanding federal unemployment loans and are subject to reduced FUTA credit. This is why current Form 940 instructions and Schedule A matter.
How FUTA connects to Form 940
Form 940 is the annual return used to report FUTA tax. It is different from Form 941, which reports quarterly federal income tax withholding and FICA taxes.
Form 940
Reports annual FUTA tax and uses Schedule A when multi-state or credit reduction reporting is needed.
Payroll tax deposits
FUTA deposit timing depends on the amount of FUTA tax liability, while Form 940 reports and reconciles the annual tax.
Calculation practice
FUTA questions often test the $7,000 wage base and whether the tax is employer-only.
Turn FUTA rules into recall.
Practice employer tax, wage-base, and reporting questions inside PrepToPay.