13.6 FUTA & Unemployment Taxes
Key Takeaways
FUTA 2025: 6.0% statutory rate on first $7,000 of wages per employee — employer only, never withheld.
Up to 5.4% state UI credit → typical net FUTA 0.6% ($42 per employee at the cap).
Credit reduction states (§3306): states that borrowed from the federal UI fund and didn't repay; credit drops 0.3% per year.
Form 940 (annual FUTA) due January 31 (Feb 10 if all deposits made on time).
FUTA deposit required quarterly when cumulative liability exceeds $500.
State Unemployment (SUTA) wage bases and rates vary by state — no federal change for 2025.
OBBBA tips/overtime after-AGI Schedule 1-A deductions DO NOT reduce employer FUTA — the wages are still FUTA-taxable.
Why This Matters for the Exam
FUTA is an employer-only tax. Know the wage base, the 5.4% credit, the credit-reduction concept, and the Form 940 / deposit rules. The FUTA structure was not changed for 2025.
FUTA Basics (2025 — unchanged from 2024)
| Element | Amount |
|---|---|
| Statutory rate | 6.0% |
| Wage base | First $7,000 per employee per year |
| Paid by | Employer only |
| Withheld from employee | NEVER |
The 5.4% Credit
| Component | Rate |
|---|---|
| Gross FUTA | 6.0% |
| State UI credit (max) | (5.4%) |
| Typical net FUTA | 0.6% |
The 5.4% credit applies when the employer paid state unemployment (SUTA) tax timely on the same wages in a non-credit-reduction state.
Net FUTA Calculation
| Employee Wages | Taxable Wages | × 0.6% | FUTA Due |
|---|---|---|---|
| $50,000 | $7,000 | × 0.6% | $42 |
| $7,000 | $7,000 | × 0.6% | $42 |
| $5,000 | $5,000 | × 0.6% | $30 |
§3306 Credit Reduction States
When a state borrows from the federal unemployment trust fund and fails to repay by November 10 of two consecutive years, employers in that state lose part of the 5.4% credit.
| Rule | Effect |
|---|---|
| State borrowed and did not repay | Credit reduced |
| Reduction per year | 0.3% (additive) |
| Result | Higher effective FUTA rate paid via Form 940 Schedule A |
For Tax Year 2025, California has a 1.2% credit reduction and the U.S. Virgin Islands has a 4.5% credit reduction. Do not use the 2024 state list. 2025 Schedule A (Form 940).
Credit Reduction Example
| Component | Rate |
|---|---|
| Gross FUTA | 6.0% |
| Standard credit | (5.4%) |
| Reduction (2 years × 0.3%) | + 0.6% |
| Net credit | 4.8% |
| Effective FUTA | 1.2% |
State Unemployment (SUTA)
| Item | Treatment |
|---|---|
| Wage base | Varies by state (no federal change for 2025) |
| Rate | Experience-rated by state |
| Paid by | Employer only in most states (a few states require small employee contribution) |
| Interaction with FUTA | Timely SUTA payment = 5.4% federal credit |
Form 940 (Annual FUTA)
| Element | Requirement |
|---|---|
| Form | Employer's Annual FUTA Tax Return |
| Due date | January 31 (Feb 10 grace if all required deposits were paid on time) |
| Deposit | Quarterly via EFTPS when cumulative liability exceeds $500 |
Deposit Rules
| Quarterly Cumulative Liability | Action |
|---|---|
| > $500 | Deposit by end of next month |
| ≤ $500 | Carry to next quarter |
Quarterly Deposit Example
| Quarter | Liability | Cumulative | Deposit Required? |
|---|---|---|---|
| Q1 | $102 | $102 | No (carry) |
| Q2 | $350 | $452 | No (carry) |
| Q3 | $200 | $652 | Yes (> $500) |
OBBBA Note for FUTA / Wages
The OBBBA "No Tax on Tips" (up to $25,000) and "No Tax on Overtime" (up to $12,500 Single / $25,000 MFJ) deductions for 2025-2028 are after-AGI Schedule 1-A deductions claimed by the employee on the individual return. They DO NOT reduce wages for FICA, FUTA, SUTA, or income tax withholding — employers still report and withhold on the gross amount. See section 13.4 and Chapter 14 for reporting details.
Real-World Scenario (2025)
Scenario: Employer pays $50,000 to one employee in 2025. State UI paid timely. No credit reduction.
- Taxable wages: $7,000 (first $7,000 only).
- Gross FUTA: $7,000 × 6.0% = $420.
- Credit: $7,000 × 5.4% = $378.
- Net FUTA: $420 − $378 = $42.
On the Exam
Question types to practice on FUTA:
- Calculation Questions: "$50,000 wages — FUTA due?"
- Form Questions: "Which form reports annual FUTA?"
- Deposit Questions: "When is FUTA deposit required?"
- Credit Reduction Questions: "What happens to FUTA in a credit-reduction state?"
The key is to remember: 6.0% on first $7,000. Credit 5.4% → net 0.6% = $42. Form 940 annual (Jan 31). Deposit quarterly when cumulative > $500. Credit reduction → 0.3% less per year.
Employee earns $50,000. Employer in state with no credit reduction. FUTA due?
$300
$42
$3,000
$0
Which form reports annual FUTA liability?
Form 941
Form 944
Form 940
Form 1099-NEC
When is FUTA deposit required?
Monthly always
Quarterly if >$500
Annually with Form 940
Next-day if >$100,000
Sections you finish are checked off in the contents.