What Is FUTA? Overview and How It Works

By Kristi Waterworth – Updated Jun 28, 2025 at 6:54 PM EST | Fact-checked by Frank Bass

Key Points

FUTA taxes fund unemployment insurance and job services, paid by employers, not employees.
FUTA tax applies to the first $7,000 of an employee's quarterly wages at a 6% rate.
Employers can receive a FUTA tax credit of up to 5.4% if SUTA taxes are paid in a timely manner.

Business owners are often responsible for paying federal unemployment tax on behalf of their employees, thanks to the Federal Unemployment Tax Act (FUTA). Read on to learn more about what this is and how it works for both employees and employers.

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Person filling out unemployment benefits application form. — Image source: Getty Images.

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Once you have that information, it's pretty simple to calculate in most cases.

For each employee, you're responsible for FUTA taxes for up to $7,000 in wages per quarter. We'll provide two examples, one above and one below that threshold, where you're eligible to receive the maximum tax credit.

Employee A made $10,000 during the quarter; Employee B made only $5,000.

FUTA tax liability = [employee's wages x 6%] - [eligible Tax credit x 5.4%]

Example 1

For Employee A, who made $10,000, it looks like this:

Quarterly FUTA = [$7,000 x 6%] - [$7,000 x 5.4%]

Quarterly FUTA = $420 - $378

Quarterly FUTA for Employee A = $42

Because Employee A made more than the maximum taxable income for FUTA, you only calculate it to that amount, which, in this case, is $7,000 per quarter.

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Example 2

For Employee B, it looks a bit different:

Quarterly FUTA = [$5,000 x 6%] - [$5,000 x 5.4%]

Quarterly FUTA = $300 - $270

Quarterly FUTA for Employee B = $30

FUTA is required to be paid quarterly, but if you annualize this figure, Employee A would have $168 paid on their behalf and Employee B would have $120 paid on their behalf.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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