FUTA, the federal unemployment tax: what a European employer in the US pays, and how to keep it at $42 a head

The first time a European client hires in the US, the payroll report shows a line called FUTA and a second one for the state, and the questions start. In Europe unemployment insurance is usually one contribution split between employer and employee. In the US it is two taxes, one federal and one state, both paid by the employer alone, both on a small slice of each salary. Handled well, the federal part costs you $42 per employee per year. Handled badly, it costs ten times that.

Two taxes, one system

US unemployment insurance is a federal and state partnership. Each state runs its own unemployment fund, sets its own tax rates and pays benefits to people who lose their jobs there. The federal government levies the Federal Unemployment Tax Act tax, FUTA for short, on top. The federal money covers the shared machinery of the system, and it stands behind the states: when a state fund runs dry in a recession, the state borrows from the federal government, and employers in that state later repay the loan through a higher FUTA bill.

Three features surprise Europeans:

• The employee pays nothing. You do not withhold FUTA from wages. It is an employer cost, on top of gross pay. (Social Security and Medicare are different: those are split between employer and employee. Our guide to US payroll tax covers the full stack.)
• It applies to a capped amount. Only the first $7,000 of each employee's wages in a calendar year is taxed. A software engineer on $180,000 and a part-time assistant on $9,000 cost you exactly the same FUTA.
• The headline rate is not the rate you pay. The statute says 6.0 percent. Almost every employer pays 0.6 percent, because of a credit for state unemployment tax.

Does your company owe FUTA?

The Internal Revenue Code defines an employer for FUTA purposes by two simple tests, and meeting either one is enough. For 2026 they look back at 2025 and 2026.

Full-time, part-time and temporary employees all count toward the tests. Partners in a partnership do not count as employees.

The thresholds are low on purpose. If you hire one person for five months, you are in. And once you are in, the look-back rule keeps you in for the following year too, even if the employee leaves in January.

For a foreign-owned company the important point is that the US entity is the employer. A single-member LLC that the IRS disregards for income tax is still treated as a separate entity for employment taxes: it registers for payroll, files Form 940 and pays FUTA under its own name and EIN, never under the owner's. If you are still deciding on the structure, our overview of US states and legal forms is the place to start.

The arithmetic: 6.0 minus 5.4 equals 0.6

FUTA is 6.0 percent of the first $7,000 paid to each employee in a calendar year. If you paid your state unemployment tax in full and on time, you get a credit of up to 5.4 percent against it. What is left is a net rate of 0.6 percent, or $42 per employee per year at the full wage base.

The credit applies even when your actual state rate is lower than 5.4 percent. A Texas employer with an excellent record may pay very little to the state and still receive the full 5.4 percent federal credit. That is how the system rewards states that run their funds well.

A worked example

Say your US company employs three people in 2026, each earning more than $7,000.

The numbers are small next to salaries, which is why FUTA gets ignored. The bottom row is where it stops being small, and it usually happens because a company paid people for months before registering with the state.

Credit reduction states: when the state's debt lands on your bill

A state that has borrowed from the federal government to pay unemployment benefits, and has not repaid the loan, becomes a credit reduction state. Employers who paid wages there lose part of the 5.4 percent credit. The reduction starts at 0.3 percentage points in the second consecutive year with an outstanding loan and grows by another 0.3 points each year the loan stays unpaid. Additional reductions can apply from the third and fifth years.

For 2025 the IRS lists two jurisdictions on Schedule A of Form 940:

• California, with a credit reduction of 1.2 percent, so a net FUTA rate of 1.8 percent ($126 per employee).
• The US Virgin Islands, with a credit reduction of 4.5 percent, so a net FUTA rate of 5.1 percent.

The final list for 2026 is set after November 10, 2026, the date by which states must repay their loans to escape the reduction, and the Department of Labor publishes it shortly afterwards. California appears on the draft 2026 Schedule A again, with the rates still blank, so plan for a higher FUTA bill if your people work there.

The extra tax is treated as incurred in the fourth quarter, so it goes into your fourth-quarter deposit due by the end of January. Texas, where most of our clients hire, is not on the 2025 list. That is one of many quiet reasons we like hiring here, alongside the ones in our piece on Texas as a US base.

Who and what sits outside FUTA

Not every payment is a FUTA wage, and not every worker is in FUTA employment. The exclusions that matter most to the companies we work with:

• Family in a family business. Services performed by a parent for a child's business, by a spouse for a spouse, and by a child under 21 for a parent are excluded from FUTA employment. This applies where the business is owned by the family member directly, for example a sole proprietorship. Wages a corporation pays to the owner's spouse or child are FUTA wages like any other.
• Students and exchange visitors. Services by a nonresident alien who is temporarily in the US in F, J, M or Q status are excluded when the work carries out the purpose of that status, such as on-campus work or authorized practical training. The exclusion ends when the person becomes a resident alien for tax purposes.
• Students working for their own school. Services for a school, college or university by a student enrolled and regularly attending classes there are excluded.
• H-2A farmworkers. Wages paid to H-2A agricultural workers are not subject to FUTA.
• The owners themselves. Partners are not employees, and the owner of a single-member LLC is self-employed, so the profit an owner draws is not a FUTA wage. Only an owner who is on the payroll of a corporation as an employee receives FUTA wages.
• Certain payments. Employer contributions to a qualified retirement plan (other than the employee's own elective deferrals), dependent care assistance up to $5,000 per employee, workers' compensation payments and certain fringe benefits are exempt. For 2025, moving expense and bicycle commuting reimbursements are not exempt.

Independent contractors are outside FUTA as well, and that is why the classification question deserves care. More on that below.

The state side: SUTA in Texas and elsewhere

The state unemployment tax, often called SUTA or simply the UI tax, is the bigger of the two bills. Each state sets its own wage base, its own rate for new employers and its own range for experienced ones. A few examples from the Department of Labor's survey of state laws in effect in July 2026:

The ranges cover experience-rated employers and leave out surtaxes and other assessments that some states add, so your actual Texas notice will show a few extra components. In Texas the new employer rate of 2.70 percent applies until the company has enough history for an experience rate. On a $9,000 wage base that is $243 per employee per year in the first period, against $42 of FUTA. After that, your rate depends largely on how many former employees have drawn benefits charged to your account.

Registration is a separate step. In Texas you open an unemployment tax account with the Texas Workforce Commission once you become liable, which follows the same thresholds as FUTA: $1,500 in wages in a quarter or one employee in 20 weeks. You file quarterly wage reports with the state, and those reports are what the federal credit on Form 940 relies on. If you plan to send staff over from Europe rather than hire locally, read our guide on sending employees to the USA first, because the employing entity decides which payroll obligations arise where.

Deposits and Form 940: the calendar

FUTA is reported once a year but paid during the year. The rule turns on a $500 threshold.

1. Each quarter, add up the FUTA you owe for wages paid in that quarter, plus anything carried forward from earlier quarters.
2. If the total is more than $500, deposit it by the last day of the month after the quarter ends: April 30, July 31, October 31 and January 31.
3. If it is $500 or less, carry it forward to the next quarter. A company with up to 11 employees at the full wage base will often owe less than $500 for the whole year.
4. After the fourth quarter, if the remaining balance is $500 or less, you may deposit it or pay it with the return.
5. File Form 940 by January 31. If you deposited all FUTA on time, you have until February 10. For 2026 wages, January 31, 2027 is a Sunday, so the return is due on Monday, February 1, 2027, or by February 10, 2027 if every deposit was on time.

Deposits must be made electronically, through EFTPS, IRS Direct Pay or the business tax account on IRS.gov. A disregarded single-member LLC files Form 940 under its own name and EIN. If you paid wages in more than one state, or in any credit reduction state, you attach Schedule A. Missing deposits and late returns carry penalties and interest, and the IRS letters that follow are the kind we explain in our guide to IRS notices.

Keeping FUTA and SUTA low, legally

There is no trick that makes unemployment tax disappear, and you should be wary of anyone selling one. There are, however, five habits that keep both bills where they belong.

1. Pay the state on time

The full 5.4 percent credit depends on paying the state tax by the Form 940 due date. State tax paid late still earns a credit, but only 90 percent of the late amount. Register with the state before the first payroll, not after the first letter.

2. Classify workers correctly

Paying someone as a contractor when the relationship is really employment saves FUTA and SUTA on paper and creates back taxes, penalties and interest in reality. The IRS looks at behavioral control, financial control and the type of relationship. If the answer is unclear, either side can ask the IRS for a determination on Form SS-8, which takes six months or more. In our experience the practical test is simple: if you set the hours, supply the laptop and expect the person in every Monday meeting, run them through payroll.

3. Protect your experience rating

Your state rate falls over time if few former employees claim benefits against your account. Careful hiring, clear documentation of the reasons for a dismissal, and answering state notices about benefit claims on time all help. A claim you never contest is charged to you by default.

4. Use the successor rules when you buy a business

If you acquire substantially all the property of a business and keep one or more of its employees, you are a successor employer. Wages the predecessor already paid to those people count toward the $7,000 base, so you do not pay FUTA on the first $7,000 twice in the same year. States have similar rules for transferring experience ratings.

5. Watch where people work

Remote employees are generally covered by the unemployment law of the state where they work. One remote hire in California brings the California wage base, the California new employer rate and, for now, the California credit reduction into your payroll. That is a business decision, and it should be made knowingly.

A payroll provider will calculate all of this automatically once the setup is right. The setup is where errors begin: the wrong state account, a missing registration, an owner put on payroll in the wrong entity. When the US company also keeps its own books, the payroll accounts tie into the year-end figures described in our guide to US LLC bookkeeping.