What is the FUTA tax?

Definition of FUTA Tax

FUTA is the acronym for the Federal Unemployment Tax Act and is associated with a federal payroll or employment tax paid solely by the employer. (This unemployment tax is in addition to each state's unemployment tax.) Although the FUTA tax is paid by the employer, the amount is based on each employee's wages, salary, commissions, etc. Often the FUTA tax ends up being 0.6% (6% minus a credit of 5.4%) of the first $7,000 per year of each employee's wages, salary, commissions, etc.

Example of FUTA Tax

After the credit, the employer's maximum cost for FUTA per year per employee will be $42 ($7,000 x 0.006). If an employee earns $5,000 during a calendar year, the employer's cost for that employee will be $30 ($5,000 x 0.006).

Accounting for FUTA Tax

In the double-entry system of accounting, the FUTA tax results in the following entry:

  • a credit to a liability account
  • a debit to an expense account if the employees are not involved in the manufacturing of products. (The FUTA tax for employees in the manufacturing departments is recorded in an account associated with the cost of the products.)