A federal law imposing a tax used to fund benefits for individuals who lose their jobs (26 U.S.C. §§ 3301 to 3311). Unlike taxes under the Federal Insurance Contributions Act (FICA), only the employer pays FUTA tax.

FUTA tax is a specified percentage of the wages an employer pays to its employees. However, the employer is only required to pay FUTA taxes on wages paid up to a fixed threshold ($7,000 per employee).

The employer is generally entitled to a credit against its FUTA tax obligations for amounts it pays state unemployment funds, up to a specified amount.

For more information, see Practice Note, Payroll (FICA) Taxes.