What is the FUTA tax?

FUTA (Federal Unemployment Tax Act) tax is a payroll or employment tax paid solely by the employer. Although the FUTA tax is paid by the employer, it is based on each employee's wages or salary. 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 or salary. In that situation the employer's maximum cost for FUTA per year per employee is $42 ($7,000 x 0.006). If an employee earns $5,000 during a calendar year, the employer's cost is $30 ($5,000 x 0.006).

In the double-entry system of accounting, the FUTA tax results in 1) a credit to a liability account, and 2) a debit to an expense account if the employees are not involved in the manufacturing of products. (For employees involved in manufacturing, their FUTA tax is part of the cost of the products.)