Who pays federal unemployment tax and when

Federal unemployment tax (FUTA) is paid by employers, not employees. You owe it if you paid wages to employees during a calendar quarter and meet the FUTA threshold. The threshold is $1,500 or more in wages paid in any calendar quarter of the current or prior year.

You pay FUTA once a year, by January 31 of the following year. The tax covers the previous calendar year (January 1 through December 31). If you owe less than $500 for the year, you can carry it forward to the next quarter, but any amount of $500 or more in a quarter must be paid by the due date for that quarter.

The federal unemployment tax rate is 6% of the first $7,000 of wages paid to each employee per year. Most employers receive a credit of up to 5.4% if they pay state unemployment tax on time, which brings the effective federal rate down to 0.6%. You still owe the full 6% if you are in a state that has not repaid federal loans or if you are a new employer in certain situations.

Key Takeaways

  • You pay federal unemployment tax only if you paid $1,500 or more in wages during any quarter in the current or prior year.
  • The tax is 6% of the first $7,000 of each employee's annual wages, but most employers pay an effective rate of 0.6% after the state tax credit.
  • Annual FUTA payments are due by January 31, but quarterly payments of $500 or more are due by the end of the month following the quarter.
  • You report and pay FUTA on IRS Form 940, which you file with the IRS, not with your state.
  • Sole proprietors and partners do not pay FUTA on their own income, only on wages paid to employees.

How to calculate your FUTA liability

Start with the total wages you paid to all employees during the calendar year. Include salaries, hourly wages, bonuses, and taxable fringe benefits. Do not include payments to independent contractors, since they are not employees.

For each employee, multiply the first $7,000 of annual wages by 6%. If an employee earned $10,000, you calculate tax on $7,000, not $10,000. If an employee earned $5,000, you calculate tax on $5,000. Once an employee reaches $7,000 in cumulative wages during the year, no further FUTA tax applies to that employee for the rest of the year.

Add up the FUTA tax owed on all employees. Then subtract your state unemployment tax credit. Most employers subtract 5.4%, which brings the federal rate to 0.6%. If your state has not repaid federal loans or if you are a new employer in a state with a credit reduction, your credit may be lower or zero—check your state's unemployment insurance agency website or your Form 940 instructions.

Filing Form 940 with the IRS

Form 940 is the Employer's Annual Federal Unemployment (FUTA) Tax Return. You file it once per year with the IRS, not with your state. The form asks for your total wages paid, the amount subject to FUTA tax, your state unemployment tax payments, and your final federal tax owed.

You can file Form 940 on paper or electronically through the IRS e-file system. Electronic filing is faster and reduces errors. If you use payroll software or a payroll service, they often file Form 940 for you automatically.

The important date to file Form 940 is January 31 of the year following the tax year. If January 31 falls on a weekend or holiday, the important date moves to the next business day. If you file late, you may owe a penalty and interest on the unpaid tax.

Quarterly deposits when you owe $500 or more

If your FUTA tax for any quarter reaches $500 or more, you must deposit that amount by the end of the month following the quarter. The quarterly due dates are April 30 (for Q1: January–March), July 31 (for Q2: April–June), October 31 (for Q3: July–September), and January 31 (for Q4: October–December).

You deposit FUTA tax through the Electronic Federal Tax Payment System (EFTPS) or through your bank's bill pay system if your bank is authorized to accept federal tax payments. You will need your Employer Identification Number (EIN) to set up EFTPS. Registration is free and takes a few days.

If your total FUTA tax for the year is less than $500, you do not make quarterly deposits. Instead, you pay the full amount when you file Form 940 on January 31.

Setting up EFTPS for federal tax payments

EFTPS is the IRS system for making federal tax deposits online. To enroll, go to eftps.gov and select "Enroll Now." You will need your EIN, Social Security number (if you are a sole proprietor), and your business address. The IRS mails you a Personal Identification Number (PIN) within two weeks.

Once you have your PIN, you can log in and schedule deposits. You can schedule a payment up to 120 days in advance or make same-day payments before 2 p.m. Eastern Time. The IRS confirms each payment and sends you a confirmation number for your records.

If you prefer not to use EFTPS, you can authorize your bank to make federal tax payments on your behalf. Ask your bank whether they offer this service and what information they need from you.

What happens if you miss a payment or file late

If you do not pay FUTA tax by the due date, the IRS charges a failure-to-pay penalty of 0.5% per month, up to 25% of the unpaid tax. You also owe interest on the unpaid amount, calculated daily. The interest rate changes quarterly and is published by the IRS.

If you file Form 940 late, you may owe a failure-to-file penalty in addition to the failure-to-pay penalty. If you have a reasonable cause for the delay—such as a serious illness, a natural disaster, or reliance on incorrect information from a tax professional—you can request that the IRS waive the penalty. Send a written explanation with your Form 940 or contact the IRS after you file.

If you discover you underpaid FUTA tax in a prior year, you can file an amended Form 940 (Form 940-X) to report the additional tax owed. The IRS will calculate any interest and penalties due on the late payment.

Frequently Asked Questions

Do I have to pay FUTA if I only have one employee?

Yes, if you paid that employee $1,500 or more during any quarter in the current or prior year. FUTA applies to any employer with employees who meet the wage threshold, regardless of the number of employees.

What if I have employees in multiple states?

You still file one federal Form 940 for all employees, regardless of which states they work in. You will also file state unemployment tax returns in each state where you have employees. The state tax credit on your federal return is based on the total state unemployment tax you paid across all states.

Do I pay FUTA on my own wages as a sole proprietor?

No. FUTA applies only to wages paid to employees. If you are a sole proprietor or partner, you do not pay FUTA on your own income. You pay self-employment tax instead, which is a different tax.

Can I pay my FUTA tax all at once instead of quarterly?

Only if your total FUTA tax for the year is less than $500. If any quarter reaches $500 or more, you must make quarterly deposits by the due dates. You cannot combine quarters or delay payment to stay under the $500 threshold.

What if I used a payroll service and they did not pay my FUTA tax?

You are still responsible for the tax, even if a payroll service made the error. Contact the service when ready to correct the payment. If the tax is now late, you will owe penalties and interest. You may have a claim against the payroll service for their error, but that does not eliminate your obligation to the IRS.