FUTA Tax in 2026: The 0.6% Rate, Credit Reduction States and Form 940

FUTA is the smallest federal payroll tax most employers pay, and the one they understand least. It's a tax on you, not your staff, and in a normal year it costs no more than a few dozen dollars per employee. This guide is for owners and bookkeepers who run payroll themselves or want to check a payroll provider's numbers. It covers the 2026 rate and wage base, how the state credit works, which states face a credit reduction this year, when to deposit, how to fill in Form 940 and what it all costs, with worked examples in dollars.

Quick answer

FUTA (the Federal Unemployment Tax Act tax) is an employer-only tax of 6.0% on the first $7,000 of each employee's wages each year. Pay your state unemployment tax on time and you get a credit of up to 5.4%, so the real rate is 0.6%, or at most $42 per employee. You report it once a year on Form 940.

• Never withheld from pay: the employer bears the whole cost

• Deposit when the quarter's running total tops $500; otherwise carry it forward

• Form 940 for 2026 is due February 1, 2027 (February 10, 2027 if fully deposited on time)

• California employers face a potential 1.5% to 5.3% credit reduction for 2026

What FUTA tax is and who pays it

The Federal Unemployment Tax Act funds the federal side of the unemployment insurance system. States pay jobless benefits out of their own trust funds, which are filled by state unemployment tax (SUTA). FUTA money pays for running those state programs, for the federal share of extended benefits during recessions, and for a loan fund that states borrow from when their own funds run dry. That last job is why FUTA can suddenly cost more in some states, as the credit reduction section below explains.

You owe FUTA as an employer, not on behalf of your workers. It never comes out of an employee's paycheck and never shows on a pay stub as a deduction. If your payroll software lists FUTA, it should appear as an employer cost alongside your half of Social Security and Medicare.

You're liable for FUTA if either test is met in the current or the previous calendar year:

• you paid wages of $1,500 or more in any calendar quarter, or
• you had at least one employee for some part of a day in 20 weeks or more different weeks, counting full-time, part-time and temporary staff.

The weeks test catches more businesses than owners expect. A shop with a single part-time cashier who works one shift a week for five months already meets it. Household employers have their own threshold: FUTA applies once you pay cash wages of $1,000 or more in any quarter to a nanny, housekeeper or other household worker. Farm employers become liable at $20,000 of cash wages to farmworkers in a quarter, or with 10 or more farmworkers during some part of a day in 20 different weeks.

A few kinds of employer are outside FUTA altogether. Charities exempt under section 501(c)(3) don't pay it, though they still usually owe state unemployment tax or reimburse their state for benefits. State and local government employers aren't subject to FUTA either. And if you're a sole proprietor or a partnership made up of parents, wages you pay your own child under age 21 aren't subject to FUTA.

Independent contractors don't count at all. If you pay someone on a Form 1099-NEC, there's no FUTA on what you pay them. Getting that classification right matters far more than the FUTA rate, so read 1099 vs W-2 before you hire.

The FUTA tax rate and wage base for 2026

The headline numbers haven't moved in decades, which is why so many employers get the details wrong: nobody looks them up.

FUTA at a glance (2026)

6.0%

Gross FUTA rate

On the first $7,000 per employee

5.4%

Maximum state credit

If SUTA is paid in full and on time

0.6%

Net rate most employers pay

Outside credit reduction states

$42

Most FUTA per employee

$420 with no state credit

The wage base of $7,000 is per employee, per employer, per calendar year. Once an employee's wages from you reach that amount, you stop paying FUTA on them until January 1, when the count starts again. That front-loads the tax: for a full-time employee earning $50,000, the whole FUTA liability falls in the first two months of the year.

"Wages" for FUTA means almost all pay: salaries, hourly wages, bonuses, commissions, vacation pay, severance and the cash value of most taxable fringe benefits. Some payments are left out of FUTA wages before you apply the $7,000 limit. The main ones are employer contributions to a qualified retirement plan (but not the employee's own 401(k) salary deferrals, which stay in FUTA wages), most health insurance premiums the employer pays, group-term life insurance, and dependent care assistance up to $5,000 per employee. For 2025 and later, moving expense and bicycle commuting reimbursements are no longer exempt.

If you buy a business and keep its staff, you can count the wages the previous owner paid them during the year toward the $7,000 limit, so you don't pay FUTA twice on the same employee. This successor-employer rule only applies when you acquire substantially all of the property used in the predecessor's trade or business, or a separate unit of it.

How the 5.4% state credit works

The full 6.0% rate exists mostly on paper. Congress built FUTA so that states would run their own unemployment programs: employers get a credit against FUTA for the state unemployment tax they pay, up to 5.4%. That's what cuts the real rate to 0.6%.

You get the full credit only when three things are true:

1. You paid all of your state unemployment contributions for the year.
2. You paid them by the Form 940 due date.
3. All of your FUTA wages were also subject to state unemployment tax, and your state isn't a credit reduction state.

The credit doesn't depend on your state rate. A Florida employer with a 0.1% experience rate gets the same 5.4% credit as one paying 5.4%. That's deliberate: states that keep good-record employers on low rates aren't penalised.

What happens if you pay state tax late

Pay state unemployment tax after the Form 940 due date and the credit for those late payments is capped at 90% of what it would have been. Here's what that does to one employee's FUTA. On $7,000 of wages the full credit is $378. If all of the state tax on those wages was paid late, the credit falls to $340.20, and FUTA rises from $42 to $79.80. For 15 employees, a late state payment costs an extra $567 of federal tax, before the state's own late penalties and interest. Line 10 of Form 940 and its worksheet handle the calculation.

The other common way to lose credit is paying wages that are subject to FUTA but excluded from state unemployment tax. Some states don't tax corporate officer wages, certain commissions or some nonprofit wages, so you pay the full 6.0% on those amounts. If that applies to all of your FUTA wages, line 9 of Form 940 multiplies them by 5.4% to add the lost credit back.

FUTA credit reduction states for 2026

States borrow from the federal unemployment loan fund when benefit claims outrun their trust funds, as many did during the 2008 recession and the 2020 pandemic. If a state has an outstanding federal loan on January 1 of two consecutive years and doesn't repay it in full by November 10 of the second year, its employers lose part of the 5.4% credit for that year. The reduction starts at 0.3% and grows by another 0.3% for each further year the loan stays unpaid, with extra add-ons possible from the third and fifth years.

For tax year 2025, California employers lost 1.2% of the credit and U.S. Virgin Islands employers lost 4.5%. Connecticut and New York repaid their loans before the 2025 deadline and escaped. The extra tax was due with Form 940 in early 2026.

FUTA credit reductions — 2025 final and 2026 potential

Jurisdiction	2025 (final)	2026 potential	Extra FUTA per employee in 2026	Status as of October 2026
California	1.2%	1.5% (5.3% with BCR add-on)	$105 (up to $371)	Loan still outstanding; final list after November 10
U.S. Virgin Islands	4.5%	4.8%	$0 if no balance on November 10 ($336 otherwise)	Loans repaid in May 2026
All other states	None	None	$0	No outstanding advance on January 1, 2026

California

2025 (final)

1.2%

2026 potential

1.5% (5.3% with BCR add-on)

Extra FUTA per employee in 2026

$105 (up to $371)

Status as of October 2026

Loan still outstanding; final list after November 10

U.S. Virgin Islands

2025 (final)

4.5%

2026 potential

4.8%

Extra FUTA per employee in 2026

$0 if no balance on November 10 ($336 otherwise)

Status as of October 2026

Loans repaid in May 2026

All other states

2025 (final)

None

2026 potential

None

Extra FUTA per employee in 2026

$0

Status as of October 2026

No outstanding advance on January 1, 2026

California's 2026 credit reduction

California has had an outstanding federal advance since the pandemic, so it's on the Labor Department's potential list again. The base reduction for 2026 is 1.5%, adding $105 per employee to the usual $42. Because California has now passed five or more consecutive January 1 dates with a loan outstanding, it's also exposed to the benefit cost rate (BCR) add-on, which the Labor Department estimates at 3.8% for 2026. A state can ask for that add-on to be waived by July 1 if it meets solvency conditions. California obtained a waiver for 2025; as of October 2026 we couldn't find an official confirmation for 2026. If the add-on applies, the total reduction would be 5.3%, or $371 extra per employee.

The final percentages are published after November 10 in a Federal Register notice. Until then, budget for at least the 1.5% reduction for every California employee, and check the Labor Department's FUTA credit page in mid-November.

The Virgin Islands

The U.S. Virgin Islands had a credit reduction every year from 2011 to 2025. Its Department of Labor announced on May 8, 2026 that the territory had paid off its federal loans. If it doesn't borrow again and has no balance on November 10, 2026, Virgin Islands employers keep the full credit for 2026.

How credit reduction is paid

The extra tax isn't spread over the year. The IRS treats it as a fourth-quarter liability, due with your fourth-quarter FUTA deposit by February 1, 2027. You may deposit it earlier if you prefer. You calculate it on Schedule A (Form 940) by multiplying the FUTA wages you paid in the credit reduction state by its reduction rate, then carry the total to line 11 of Form 940. Multi-state employers also use Schedule A to show which states they paid unemployment tax to, even when none of them is a credit reduction state.

Depositing FUTA tax: the $500 rule

You don't send FUTA with every payroll the way you deposit Social Security and income tax withholding. Instead, at the end of each quarter you work out your FUTA liability to date, at 0.6% on FUTA wages paid in the quarter. Then:

• if the undeposited total is more than $500, deposit it by the last day of the month after the quarter;
• if it's $500 or less, carry it forward and add it to the next quarter's liability.

At the end of the year, if what's left is $500 or less, you can either deposit it or pay it with Form 940. All federal tax deposits go through EFTPS or another electronic funds transfer; you can't deposit by card.

FUTA deposit and filing dates for 2026

April 30, 2026

Deposit Q1 FUTA if the running total is over $500

July 31, 2026

Deposit Q2 FUTA if the running total is over $500

November 2, 2026

Deposit Q3 FUTA (October 31 falls on a Saturday)

February 1, 2027

Deposit Q4 FUTA plus any credit reduction tax; file Form 940

February 10, 2027

Form 940 deadline if every deposit was made on time

The deposit penalty is the same scale that applies to other payroll taxes: 2% (1–5 days late), 5% (6–15 days), 10% (16+ days), 15% (10+ days after an IRS demand). Filing Form 940 late adds 5% of the unpaid tax for each month or part month, up to 25%, and paying late adds 0.5% a month, up to 25%, plus interest. These are small numbers on a FUTA bill, but they're avoidable.

Worked examples

A small Texas café

A café in Austin has four full-time staff earning $3,000 a month and hires two students for the summer, one earning $3,000 and the other $5,500 in total. Texas isn't a credit reduction state.

• Quarter 1: each full-timer earns $9,000, so each reaches the $7,000 limit in March. FUTA wages are 4 × $7,000 = $28,000. Liability: $28,000 × 0.6% = $168. That's under $500, so nothing is deposited.
• Quarter 2: the full-timers are already past the limit. The students earn $8,500 between them, all of it below the limit. Liability: $51. Running total: $219.
• Quarters 3 and 4: no new FUTA wages. Running total stays $219.

The café never crosses the deposit threshold, so it pays $219 with Form 940 by February 1, 2027. Its six employees cost an average of $36.50 each in FUTA for the year.

A 20-person California company

A software firm in San Diego pays 20 employees, all earning more than $7,000 by the end of March.

• Normal FUTA: 20 × $7,000 × 0.6% = $840. Because $840 is over $500, it deposits $840 by April 30, 2026.
• Credit reduction at 1.5%: $140,000 × 1.5% = $2,100, due with the fourth-quarter deposit by February 1, 2027.
• Total FUTA for 2026: $2,940, or $147 per employee.

If the BCR add-on isn't waived and the reduction is 5.3%, the extra tax is $140,000 × 5.3% = $7,420 and total FUTA becomes $8,260, or $413 per employee. That's a difference of more than $5,000 for one mid-sized employer, which is why California payroll budgets should be checked against the final November figure.

A multi-state employer

A company with 8 employees in Nevada and 5 in California applies the reduction only to California wages. Nevada FUTA: 8 × $42 = $336. California FUTA before reduction: 5 × $42 = $210, plus 5 × $105 = $525 for a 1.5% reduction. It lists both states on Schedule A. If an employee moves from Nevada to California mid-year, the $7,000 limit is shared: wages already paid in Nevada count toward it.

How to file Form 940

Form 940 is a two-page annual return, plus Schedule A for multi-state or credit reduction employers. Most payroll software produces it automatically. If you prepare it yourself, the key lines are:

Completing Form 940 step by step

1. 1

   Part 1: your state

   Enter the two-letter code of the state where you paid unemployment tax (line 1a), or check line 1b and attach Schedule A if you paid in more than one state. Check line 2 if you paid wages in a credit reduction state.

2. 2

   Part 2: FUTA wages

   Line 3 is total payments to employees. Subtract exempt payments (line 4) and the amounts over $7,000 per employee (line 5). Line 7 is your taxable FUTA wages; multiply by 0.6% on line 8.

3. 3

   Part 3: adjustments

   Line 9 applies if all your FUTA wages were excluded from state tax; line 10 if some were, or you paid state tax late; line 11 carries the credit reduction from Schedule A.

4. 4

   Part 4: total and balance

   Line 12 is total FUTA after adjustments. Subtract deposits (line 13) to find a balance due or overpayment.

5. 5

   Part 5: quarterly liability

   If line 12 is more than $500, break the liability down by quarter on lines 16a to 16d. The total must equal line 12.

   Tip: Put any credit reduction tax in the fourth quarter, not spread across the year.

6. 6

   Sign and file

   E-file through Modernized e-File using software or a provider, or mail the paper form. File by February 1, 2027, or by February 10, 2027 if every deposit was on time.

   Instructions for Form 940

The current Form 940 has a few recent changes. Aggregate filers such as certified professional employer organizations now identify themselves in a dedicated section, refunds can go by direct deposit or be applied to next year's return, and balances due should be paid electronically. You can also see Form 940 transcripts for 2023 and later in your IRS business tax account.

You file one Form 940 per employer identification number, even if you also file Forms 941 quarterly. If you close the business or stop paying wages, check the box on line (d) of the return's "Type of return" area and file a final return. If you need to fix a filed Form 940, file a new Form 940 with the "Amended" box checked; amended returns can now be e-filed too.

Common FUTA mistakes and how to fix them

Withholding FUTA from employees. It's an employer tax only. If you've been deducting it, stop, refund the employees and correct their pay records.

Paying FUTA on every dollar. Spreadsheet payrolls often apply 0.6% to all wages all year. Track each employee's year-to-date FUTA wages and stop at $7,000.

Forgetting the restart on January 1. The limit resets each year for every employee, including those who reached it last year.

Ignoring the credit reduction until the return. California employers who budget only $42 a head get a surprise bill in January. Reserve for the reduction each quarter even though it's due with the fourth-quarter deposit.

Paying the state late to manage cash flow. Every late state dollar trims your FUTA credit to 90%, so the state penalty and the extra federal tax together cost far more than a short-term loan would.

Missing the $500 trigger. The carry-forward rule tests the running total, not the quarter alone. Three quarters of $200 each mean a deposit is due after the third quarter, when the total reaches $600.

Treating FUTA as optional for tiny payrolls. The weeks test means even one part-time worker can make you liable. If you met either test and didn't file, file the missing Form 940s now; the penalties on small FUTA amounts are modest, and the IRS will eventually match your W-2 filings against missing returns.

After you file

FUTA sits alongside your other employer obligations. Your state unemployment tax is the bigger cost in most states and drives your FUTA credit, quarterly Form 941 reports Social Security, Medicare and income tax withholding, and Form W-2 closes out each employee's year by January 31. For the full picture of what an employee costs, see payroll taxes for small business, and keep every payroll and FUTA record for at least 4 years.

Official links

• About Form 940Form, Schedule A and instructions
• Instructions for Form 940Line-by-line guide, credit reduction table
• Publication 15 (Circular E)FUTA deposit rules and exempt payments
• DOL FUTA credit reductionsPotential and final credit reduction states
• EFTPSMake federal tax deposits

Once your FUTA is set up correctly it runs itself: a check each quarter against the $500 trigger, and one return a year. Use the salary slip generator to show employees what they earn and what you pay on top. This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is the FUTA tax rate for 2026?

The FUTA tax rate is 6.0% on the first $7,000 you pay each employee in the calendar year. If you pay your state unemployment tax in full and on time, you get a credit of up to 5.4%, so the rate you actually pay is 0.6%. That works out to at most $42 per employee per year, unless your state is a credit reduction state.

Do employees pay FUTA tax?

No. FUTA is paid only by the employer. You must never withhold it from an employee's paycheck, and it doesn't appear as a deduction on the pay stub. A few states, including New Jersey and Pennsylvania, take a small state unemployment contribution from workers' pay, but that is a state tax, not FUTA.

Which states have a FUTA credit reduction for 2026?

The Labor Department's potential list for 2026 names California and the U.S. Virgin Islands. California faces a 1.5% reduction, which could rise to 5.3% if the benefit cost rate add-on isn't waived. The Virgin Islands repaid its federal loans in May 2026, so it avoids its potential 4.8% cut if it has no balance on November 10. The final list comes out after that date.

When is Form 940 due for 2026?

Form 940 for 2026 is due February 1, 2027, because January 31, 2027 falls on a Sunday. If you deposited all of your FUTA tax on time, you have until February 10, 2027 to file. Any credit reduction tax is due with your fourth-quarter deposit by the same February 1, 2027 date.

When do I have to deposit FUTA tax?

Work out your FUTA liability at the end of each quarter. If the undeposited amount is more than $500, deposit it through EFTPS by the last day of the month after the quarter. If it's $500 or less, carry it forward to the next quarter. Many small employers with a few staff never cross the threshold and simply pay with Form 940.

What is the difference between FUTA and SUTA?

FUTA is the federal unemployment tax: one rate, one $7,000 wage base, paid on Form 940. SUTA is your state's unemployment tax, with its own wage base, a rate that changes with your layoff history, and quarterly state reports. The two are linked: paying SUTA on time is what earns the 5.4% credit that cuts FUTA to 0.6%.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 13 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Instructions for Form 940 (2025) — Internal Revenue Service · accessed 13 October 2026
2. 2.Publication 15 (2026), (Circular E), Employer's Tax Guide — Internal Revenue Service · accessed 13 October 2026
3. 3.FUTA Credit Reductions — U.S. Department of Labor, Employment and Training Administration · accessed 13 October 2026
4. 4.Potential 2026 Federal Unemployment Tax Act (FUTA) Credit Reductions — U.S. Department of Labor, Employment and Training Administration · accessed 13 October 2026
5. 5.Notice of the Federal Unemployment Tax Act (FUTA) Credit Reductions Applicable for 2025 (FR Doc. 2026-00342) — U.S. Department of Labor (Federal Register) · accessed 13 October 2026
6. 6.U.S. Virgin Islands pays off outstanding UI loans — PayrollOrg · accessed 13 October 2026
7. 7.California and Virgin Islands may face credit reduction for 2026 — PayrollOrg · accessed 13 October 2026