FUTA is a federal unemployment tax that only employers pay. It is 6.0% on the first $7,000 of each employee's wages, and paying state unemployment tax on time cuts the effective rate to 0.6%, or $42 per employee per year. Sole proprietors, partners, and LLC members don't owe FUTA on their own earnings. S-Corp owner-employees do owe it on their salary, so they have a yearly Form 940 filing due January 31. Employers in credit reduction states like California pay more. Payroll providers usually calculate, deposit, and file FUTA automatically, but the penalties for missing it can easily cost more than the tax itself.
FUTA is one of those taxes that shows up as a line item long before anyone explains it. It is not withheld from anyone's paycheck, it does not appear on a W-2, and for most self-employed people it does not apply at all. Then they elect S-Corp status, start running payroll, and a line labeled "FUTA" shows up on their payroll report.
The good news: for most S-Corp owners, FUTA costs $42 a year and your payroll provider calculates, deposits, and files it for you. Here's what it is, where it shows up, and the few things your payroll system can't do on its own.
FUTA stands for the Federal Unemployment Tax Act. It is a federal payroll tax paid entirely by employers that funds the administration of state unemployment insurance programs and a loan account that states can draw on when their unemployment funds run dry.
The critical word is *employers*. FUTA is not a shared tax like Social Security and Medicare, where the employee and employer each pay half. The IRS states it plainly on the Form 940 page: "Only employers pay FUTA tax. Do not collect or deduct FUTA tax from your employees' wages."
If you have ever looked for FUTA on your pay stub and could not find it, that is why.
FUTA appears under employer taxes (not employee withholdings), usually labeled "FUTA" or "Federal Unemployment," and it stops accruing once an employee passes $7,000 in wages for the year.
Two numbers do most of the work.
Per IRS Topic No. 759:
That would be $420 per employee, except almost nobody pays that. Employers who pay their state unemployment tax on time receive a credit of up to 5.4%, which brings the effective rate down to 0.6%.
At 0.6% on a $7,000 wage base, the real cost is $42 per employee per year in most states. It is one of the smallest line items in payroll, which is exactly why it gets ignored until a filing deadline is missed.
Not every business with a payroll owes FUTA. There are threshold tests, and they differ by employer type. Per the IRS Instructions for Form 940:
General business employers must file Form 940 and pay FUTA if either of these is true for the current or prior year:
These are "either/or" tests, not both. And they are set by statute, so unlike most tax figures, they do not adjust for inflation.
Note how low the general threshold is. A single part-time employee at $500 a week hits $1,500 in three weeks.
This is where the answer really pays off for solopreneurs.
Sole proprietors owe no FUTA on their own earnings. You cannot be your own employee. Your net profit flows to Schedule C and Schedule SE, where it is subject to self-employment tax, not FUTA.
Partners in a partnership owe no FUTA on their distributive share or guaranteed payments. Partners are self-employed, not employees of the partnership. The IRS is explicit that partners should not be issued a W-2 for partnership services.
LLC members owe no FUTA on their distributive share. A member of an LLC taxed as a partnership is self-employed for federal tax purposes and reports through Schedule SE. Same logic.
Employees never pay FUTA. It is not withheld, ever.
Independent contractors do not generate FUTA. You pay contractors, not wages, and issue a 1099 rather than a W-2. Classify correctly, though. Misclassifying an employee as a contractor to sidestep payroll taxes is a well-worn audit trigger.
Here is the part that surprises people who elect S-Corp status, expecting the payroll side to be trivial.
Yes, S-Corp shareholder-employee wages are subject to FUTA.
The IRS position on S-Corp officers is that corporate officers are employees for FICA, FUTA, and federal income tax withholding purposes. If you perform more than minor services for your S-Corp and take compensation, you must pay yourself reasonable wages, and those wages carry the full payroll tax apparatus, FUTA included.
You cannot avoid it by taking distributions instead. The IRS has documented its position on characterizing distributions as something other than wages when services are being performed.
Practically speaking, this is a small number. Your salary almost certainly exceeds $7,000, so you cap out at $42 in a full-credit state. The cost is not the money; it's the compliance: you now have an annual Form 940 obligation, and missing it is expensive relative to $42.
There is a second wrinkle worth flagging: family employment exemptions shrink once you incorporate. Per IRS guidance on family employees, a child under 21 working for a parent is exempt from FUTA only if the business is a sole proprietorship or a partnership in which every partner is the child's parent. Once the business is a corporation, even one you own outright, the exemption disappears. Same for a parent employed by their child's business, and same for spousal employment. If part of your tax plan involves putting family on the payroll, the entity type changes the math.
The 5.4% credit assumes your state is in good standing with the federal government. When a state borrows from the federal unemployment account and does not repay within roughly two years, employers in that state lose part of the credit. The reduction starts at 0.3% and grows each year the loan goes unpaid.
For tax year 2025, filed in early 2026, two jurisdictions were subject to credit reduction:
Connecticut and New York were both at risk and repaid their loans before the November 10, 2025 deadline, so employers there kept the full credit. Confirm current-year status against IRS Schedule A (Form 940) and the Department of Labor's credit reduction page before filing, since the list changes annually and is not finalized until after November 10 each year.
If you are a California S-Corp owner-employee, the difference between $42 and $126 is small, but the reduction is retroactive for the whole year and is settled on the return, so it comes as a surprise at filing time.
The two are related but not interchangeable.
FUTA is federal, flat, and uniform: 6.0% gross, 0.6% net after full credit, on the first $7,000 per employee. Every covered employer in the country faces the same structure.
SUTA (State Unemployment Tax Act) is set by each state individually. Rates are usually experience-rated, meaning an employer with a history of unemployment claims pays more than one without. Wage bases vary by state, and many are well above the federal $7,000, so SUTA is typically the far larger of the two costs.
The link between them is the credit. FUTA gives you up to 5.4% back for paying SUTA on time, which is why late SUTA payments cost you twice: penalties at the state level and a reduced federal credit.
Your payroll provider does this automatically, but here's the math so you can sanity-check the report. The arithmetic is simple once the wage base is clear.
Example: three employees paid $50,000, $30,000, and $5,000. FUTA wage base is $7,000 plus $7,000 plus $5,000, which is $19,000. At 0.6%, FUTA tax is $114 for the year. In California for 2025, at 1.8%, the same payroll would owe $342.
Full-service payroll covers most of FUTA automatically. A few setup items are still on you.
If you run payroll through a full-service provider, it files Form 940 and makes deposits for you. The deadlines below matter if you run payroll manually or switch providers mid-year.
The return. Form 940 is filed annually. It is due January 31 for the prior year, with an extension to February 10 if you deposited all FUTA tax when due. When January 31 falls on a weekend, it rolls to the next business day.
The deposits. You do not always wait until January. Per IRS Topic No. 759, if your FUTA liability exceeds $500 for the calendar year, you must deposit at least quarterly, by the last day of the month following the quarter's end: April 30, July 31, October 31, and January 31. If your cumulative liability is $500 or less, it carries forward, and you can pay it with the annual return.
For a solo S-Corp owner, the $500 threshold means you almost never make quarterly deposits. Your entire annual liability is $42.
The penalties. This is where a $42 tax becomes an expensive mistake. The failure-to-file penalty is 5% of the unpaid tax per month, up to 25%, with a minimum penalty if you are more than 60 days late. Late payment incurs a per-month fee. Deposits are tiered from 2% to 15% depending on how late. The current rules are on the IRS pages for the failure to file penalty, the failure to pay penalty, and the failure to deposit penalty.
The risk profile of FUTA is unusual: trivially small tax, disproportionately large penalty for forgetting it exists.
*Cornerstone figures are average fees for 2025 (published early 2026). Ignition figures are from its 2025 benchmark. Bookkeeping ranges are from inDinero's 2026 analysis. The WCG rate card is dated April 2026, and software prices are as of August 2026. These are market averages, not quotes; entity type, book condition, and state filings move actual prices. QuickBooks prices as of September 2026.