Unemployment benefits provide a crucial safety net for millions of Americans. As of February 2025, the national unemployment rate sits at 4.1%, meaning roughly 7.1 million people could qualify for unemployment insurance. But where does the funding for these benefits come from?

Enter the Federal Unemployment Tax Act (FUTA) — a payroll tax that ensures states have the resources to support unemployed workers. If you’re a business owner, this is one of many tax obligations you’ll need to navigate.

But don’t worry, FUTA taxes aren’t as complicated as they seem. In this article, we’ll break down what FUTA taxes are and how they work, the current tax rates and how they impact your business, how to file correctly and avoid penalties, and much more. 

Whether you’re running payroll through OnTheClock, crunching the numbers in-house, or relying on a third-party provider, understanding FUTA is essential for compliance. Let’s dive in.

What Is FUTA 

If a company pays wages of $1,500 or more to employees in a calendar year, it’s required to pay FUTA tax. This tax is in addition to any state unemployment insurance (SUTA) it may owe.

But here’s the question: Who pays FUTA taxes? The answer: Employers. Employees won’t pay FUTA deductions on their paychecks, but the tax is still based on their wages. Specifically, FUTA applies to the first $7,000 paid to each employee per year at a standard rate of 6%. However, most employers qualify for a FUTA tax credit of up to 5.4%, reducing the effective rate to just 0.6% — which means a company will likely pay a maximum of $42 per employee per year.

Unlike payroll taxes that are withheld every pay period, FUTA is paid quarterly or annually. Payments are due on the last day of the month following the end of each quarter.

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The 2025 FUTA Tax Rate

As previously mentioned, the maximum FUTA tax per employee is $420 per year ($7,000 × 6%).

While the FUTA tax rate has been relatively stable, its net rate has only increased three times since its creation in 1939, when it started at 0.3%. The 6% rate has remained unchanged in recent years, though state-level SUTA rates and credit reductions can impact a company’s actual FUTA liability.

What Are FUTA Credit Reduction States?

A credit reduction state is one that has taken federal loans to cover unemployment benefits but hasn’t repaid them by the deadline. When this happens, employers in those states lose part of the standard 5.4% FUTA tax credit, increasing their FUTA tax rate.

If a state is subject to a credit reduction, the FUTA tax rate increases for employers in that state. Instead of the usual 0.6% net FUTA tax rate, the reduction lowers the available credit, leading to higher costs per employee.

For example: If a state’s credit reduction is 0.3%, the employer’s effective FUTA rate would be 0.9% instead of 0.6%. This means the employer pays $63 per employee instead of $42.

Key FUTA Takeaways for 2025

• Standard FUTA rate: 6.0% on the first $7,000 of each employee’s wages..
• Maximum FUTA tax per employee: $420.
• Potential FUTA credit: Up to 5.4%, reducing the net rate to 0.6%.
• Quarterly payments are required if FUTA liability exceeds $500

Which States Are Affected?

For the 2024 tax year, California, New York, and the U.S. Virgin Islands qualified for a FUTA credit reduction. As a result, employers in these states paid higher federal unemployment tax when they filed Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2024.

The U.S. Department of Labor (DOL) has identified California, Connecticut, New York, and the U.S. Virgin Islands as potential FUTA credit reduction states and territories for 2025. The final determination will be made after Nov. 10, 2025.

For 2024, California and New York had a 0.9% credit reduction, and both may see an increase to 1.2% in 2025.

Connecticut was not subject to a credit reduction in 2024. However, due to ongoing borrowing from the federal government and an outstanding Federal Unemployment Account loan, it now meets the criteria for a potential 1.2% credit reduction in 2025.

The U.S. Virgin Islands has been in credit reduction status since it began borrowing in August 2009. With an outstanding loan balance, it faced a 4.2% reduction in 2024, which may increase to 4.5% in 2025.

California, Connecticut, and New York may also be affected by the Benefit Cost Rate (BCR) add-on for 2025, while the U.S. Virgin Islands is exempt. As of Jan. 10, California's potential add-on is 3.7%, Connecticut's is 0.8%, and New York's is 1.1%. This brings the projected FUTA credit reductions to 4.9% for California, 2% for Connecticut, and 2.3% for New York. However, these figures could change based on specific factors, and eligible states have until July 1 to request a waiver of the BCR add-on.

What Are the Differences between FUTA, SUTA, and FICA?

Understanding the distinctions between FUTA, SUTA, and FICA is crucial for employers managing payroll and tax compliance. While all three taxes relate to employment, they serve different purposes and have unique payment structures.

As showcased in this article, FUTA funds federal unemployment insurance programs, providing financial assistance to state unemployment agencies. It’s paid solely by employers and filed using Form 940.  

State Unemployment Tax Act

The State Unemployment Tax Act (SUTA) funds state-level unemployment programs, ensuring benefits for eligible unemployed workers. It’s paid primarily by employers, though some states require employees to contribute. The rate (and the form used to file it) varies by state and is influenced by the employer’s industry, payroll size, and history of unemployment claims.

Federal Insurance Contributions Act

The Federal Insurance Contributions Act (FICA) funds Social Security and Medicare programs. It’s paid by both employers and employees at a combined rate of 12.4% (6.2% withheld from employees + 6.2% employer match) on wages up to $176,100 (2025 cap).

For Medicare, the total amount withdrawn is 2.9% total (1.45% withheld from employees + 1.45% employer match), with an additional 0.9% on wages exceeding $200,000 (for high earners). These taxes are filed on Forms 941 (quarterly) or Form 944 (annually).

Employers must pay all three taxes, but only FICA is shared with employees. FUTA and SUTA focus on unemployment benefits, while FICA supports retirement and health care programs. 

When Do I have to File FUTA Taxes?

As an employer, you must pay FUTA taxes quarterly if your total FUTA tax liability for the quarter is $500 or more.

Quarterly Payment Schedule

If your FUTA tax liability reaches or exceeds $500 in a quarter, you must deposit the payment by the following due dates:

What If My FUTA Tax Is Less Than $500?

If your total FUTA tax liability for a quarter is less than $500, you don’t need to make a deposit yet. Instead, carry it forward to the next quarter until your accumulated FUTA tax reaches $500.

If your total FUTA tax liability for the entire year is less than $500, you can pay the full amount when filing Form 940 (due by Jan. 31 of the following year).

How Can I Pay FUTA Taxes?

FUTA tax payments must be made through the Electronic Federal Tax Payment System (EFTPS), which is required for all federal tax deposits.

Here are the steps to enroll in EFTPS: 

1. Go to EFTPS.gov and select "Enroll" to begin the registration process.
2. Provide your Employer Identification Number (EIN), business information, and bank details.
3. The IRS will mail you a PIN (Personal Identification Number) within five to seven business days.
4. Once you receive your PIN, return to EFTPS.gov to create a login and set up your payment preferences.

Simplify Your Tax Obligations with OnTheClock

Staying on top of your FUTA tax obligations is essential for maintaining compliance and avoiding unnecessary penalties. While federal unemployment taxes may seem complex, understanding key details, such as tax rates, credit reductions, and payment deadlines, can help you manage them with confidence.

OnTheClock simplifies payroll processing by automatically calculating tax liabilities, including FUTA, so you can focus on growing your business instead of getting lost in tax calculations. Whether you're tracking employee hours or running payroll, OnTheClock’s integrated solutions ensure accuracy and efficiency every step of the way.

Looking for a seamless way to manage time tracking and payroll? Try OnTheClock today!