Hey {{first_name|there}},
If you have employees, there is a federal tax you pay entirely yourself.
It is called FUTA.
This week I'll go through who owes it, what it actually costs, and why employers in California should be budgeting for a lot more than the usual $42 a head.
Let’s get into it.
The payroll tax you pay and never withhold
FUTA is the Federal Unemployment Tax Act. It funds the administration of state unemployment insurance programs and the federal Unemployment Trust Fund, which lends money to states when their own reserves run dry.
The part that catches people out is that it is employer-only. Employees contribute nothing. There is no line for it on a stub, no deduction to point at, and no prompt in your payroll run. It just sits on your books until Form 940 comes due.
Here is who owes it, how the math works, and what to do if you have staff in California.
FUTA MATH — ONE EMPLOYEE EARNING $20,000/YEAR
TAXABLE WAGES (first $7,000 only) | $7,000.00 |
GROSS FUTA TAX (6%) | $420.00 |
ALLOWABLE CREDIT (5.4%) | −$378.00 |
TOTAL FUTA OWED | $42.00 |
TL;DR
FUTA is the Federal Unemployment Tax Act. Employers pay all of it, employees contribute nothing, and it never appears on a pay stub.
The rate is 6% on the first $7,000 you pay each employee. Pay your state unemployment tax in full and on time and you claim a credit of up to 5.4%, which drops it to 0.6%, or about $42 per employee for the year.
California is the exception. That credit is shrinking every year the state's federal loan goes unpaid, and 2026 could take the effective rate to 2.1%, or up to $147 per employee.
Working out what you actually owe
Four steps. Identify the taxable wages, which is the first $7,000 of each employee's pay including bonuses, commissions, PTO and reported tips. Apply the 6% rate. Subtract your allowable credit for state unemployment tax paid in full and on time. What is left is what you owe.
That $42 assumes two things: your state payments were on time, and your state is not in debt to the federal government. Miss either one and the number climbs.
THREE TAXES, EASILY CONFUSED
FUTA | Federal. Employer only. Funds the administration of unemployment programs. |
SUTA | Your state's tax. Pays the actual benefits. Wage bases run far higher, Washington's is $78,200. |
FICA | Social Security and Medicare. You and your employee split this one. |
TL;DR:
The $1,500 threshold is total wages across everyone on payroll in a quarter, not per person. Two part-timers at $250 a month will get you there.
Properly classified independent contractors are outside FUTA entirely. So are wages you pay your spouse, your parent, or your child under 21.
Household employers report on Schedule H with the 1040, not Form 940.
Pay Stub Generator
Create pay stubs that track gross wages per employee, which is exactly what Form 940 gets built from. Takes a couple of minutes and saves you reconstructing the year in January.
01. You file once a year, but you pay as you go. Form 940 covers the whole year and for 2026 wages it is due February 1, 2027. Once your liability passes $500 in a quarter though, you have to deposit electronically by the last day of the following month. Anything under $500 rolls forward. |
02. California is the outlier. Of the 22 states that borrowed federal money during the pandemic, it is the only one that still has not repaid. The credit drops 0.3 points every year the debt stands. It was 1.2% for 2025, so 2026 is on track for 1.5%, which takes the effective rate to 2.1% or up to $147 per employee. |
03. Nothing is final until November 10. The Department of Labor confirms the year's credit reduction states after that date. If you have staff in a borrowing state, budget for the higher rate now rather than finding out in January. |
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One note: We are not a CPA firm or a tax advisory service. We make it easy to create pay stubs, invoices, W-2s and 1099s.
For anything specific to your situation, talk to your accountant.
See you next week.
Russ — The PayStubsNow team