This article is for employers who need to understand FUTA tax requirements and how Gusto handles them.
The Federal Unemployment Tax Act (FUTA) tax provides unemployment payments to workers who lose their jobs. Only employers pay this tax. We calculate and withhold your FUTA tax amount throughout your payrolls, unless your company qualifies for an exemption.
You can view related tax forms (Form 940) in your account once we file them.
FUTA rates
The FUTA tax rate is 6%. This rate applies to wages up to the first $7,000 each employee earns. This totals $420 in annual FUTA tax for each employee.
However, employers usually get a credit of 5.4% when they pay state unemployment taxes on time. This lowers the FUTA tax rate to 0.6%, which totals $42 in annual FUTA tax amount for each employee.
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We handle all FUTA payments and filings for our payroll customers. The Internal Revenue Service (IRS) sets rules for when FUTA payments are due:
If your FUTA liability exceeds $500 in any quarter, you must send payment by the last day of the month after the quarter ends.
If your FUTA tax liability is $500 or less in a quarter, you carry it forward to the next quarter. You keep carrying the tax liability forward until your total FUTA tax liability exceeds $500. At that point, you must deposit your FUTA tax in that quarter.
If your total FUTA tax liability for the year is $500 or less, you pay the tax with your Form 940 by January 31.
Employers in the following states will pay a general FUTA credit reduction of 1.2% on wages they pay to employees for work in any of these states in the 2025 tax year:
California
Connecticut
New York
The Virgin Islands have a credit reduction of 4.5% for 2025.
The reduction will make employers pay an effective tax rate of 0.6% + the FUTA credit reduction, or up to ~ $126 for each employee when you apply it to the federal unemployment-taxable wage base of $7,000.
Every year, the federal government classifies some states as credit reduction states. These states borrowed money from the federal government to help pay their state unemployment insurance benefits. If the states do not repay the loan on time, the federal government reduces the 5.4% FUTA credit it gives to employers.
Employers in these states will owe more tax. They pay this with the annual Federal Unemployment Form 940 in January.
The US Department of Labor finalizes the list of credit reduction states annually in November. You can read more about this credit reduction on the IRS website.
When a business or its employees qualify for an exemption from state unemployment, the business usually can no longer able to apply the 5.4% FUTA credit and must pay more FUTA. Check out pages 3 and 4 of this IRS reference for more information.
The most common scenarios where businesses pay more FUTA include:
Businesses with all employees exempt from SUI
Employers that do not pay into state unemployment at all must pay an extra 5.4% ($378) in FUTA tax on each employee’s wages.
Businesses with a combination of employees who pay into state unemployment and employees who are exempt from state unemployment
Employers that pay into state unemployment for some employees but not others may need to pay up to the extra 5.4% in FUTA taxes.
The Worksheet for Line 10 of Form 940 (found on page 12 here) determines the amount of extra FUTA tax. The amount of extra tax due depends on how much the employer paid into state unemployment taxes. If the business paid enough into state unemployment, they may not need to pay any extra FUTA tax at all. Our system automatically makes these calculations for you.
Businesses that paid state unemployment tax late
Employers that pay state unemployment tax late may need to pay extra FUTA tax, up to the maximum 6% rate. The Worksheet for Line 10 of Form 940 (found on page 12 here) also determines this. Our system assumes that you paid all state unemployment taxes on time.