What is federal unemployment tax?
Federal unemployment tax is paid by the employer. It is not a line that comes out of a normal paycheck. Most employers pay $42 per employee for the year.
The bill that should not touch the deposit
The first time a small employer sees FUTA on a payroll invoice, it looks like a tax that should have been withheld. It was not supposed to be. Social Security and Medicare are split: the employee pays half, the employer pays a matching half, and the employee’s half is printed on the stub. Federal unemployment tax is the employer’s alone. Nothing is withheld from a normal paycheck to cover it. If a stub labels a deduction FUTA, ask payroll what that code actually is before treating the deposit as short.
The tax funds the federal side of unemployment insurance. State unemployment tax is a separate bill, also paid by almost all employers. State tax paid on time is what creates the federal credit. A state unemployment line on a stub, in a state that withholds one from employees, is that state program. It is a different tax from FUTA.
Why the usual bill is $42
IRS Topic No. 759 sets the FUTA rate at 6.0% of the first $7,000 paid to each employee during the year. Six percent of $7,000 is $420. Employers who pay their state unemployment tax in full, on time, and on the same wages generally receive a credit of up to 5.4%. The rate left over is 0.6%. Six tenths of one percent of $7,000 is $42.
Wages after that first $7,000 do not add more FUTA for that person that year. The wage base does not rise with Social Security’s $184,500 base. A person who earned $50,000 and a person who crossed $7,000 can cost the employer the same $42 when the full credit applies. A person who earned $6,000 costs 0.6% of $6,000, which is $36, because the wage base was never filled.
When the credit shrinks
The full credit depends on the state tax being paid on time. A late payment can cost part of the credit, and the federal bill rises toward $420.
A credit-reduction state borrowed from the federal unemployment fund and has not repaid the loan. Employers in that state get a smaller credit and pay more than $42. The Department of Labor decides the list, and the IRS publishes it for Form 940. The list changes from year to year. This page does not name states from memory. Check the IRS credit-reduction page for the year you are filing.
Who files Form 940
The annual return is Form 940. Under the general test in IRS Topic No. 759, an employer files if they paid $1,500 or more in wages in any calendar quarter of the current or prior year, or had an employee for at least part of a day in 20 or more different weeks. Household employers and farm employers use different tests. Deposit timing is in the Form 940 instructions.
None of that changes the employee’s net pay. The lines that do are federal income tax, Social Security and Medicare, and any state or city tax on the paycheck calculator. FUTA stays on the employer’s side of the ledger. How to read a pay stub is the employee’s view of the same paycheck.
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Questions
Will I see FUTA on my pay stub?
No. Employees do not pay FUTA. Social Security and Medicare are the payroll taxes that come out of the check.
What is the 2026 amount?
The rate is 6.0% of the first $7,000 of each employee’s wages, which is $420. A credit of up to 5.4% for state unemployment tax paid on time leaves 0.6%, or $42. IRS Topic No. 759 describes the rate and the wage base.
Does a higher salary raise the tax?
Not past $7,000 of wages for that employee in the year. A $50,000 salary and a $7,000 salary can owe the same $42 when the full credit applies.
When is the tax more than $42?
When the state credit is less than 5.4%. That happens if state unemployment tax is late, or if the state is on the IRS credit-reduction list for the year. This page does not copy that list.