If you’re a sole proprietor in the United States, navigating employment-related tax responsibilities can feel overwhelming. One of the most common questions is: Do I need to pay FUTA tax? Understanding the Federal Unemployment Tax Act (FUTA) is essential if you have—or plan to hire—employees. In this blog, we’ll break down what FUTA is, who is required to pay it, how it’s calculated, and what it means specifically for small business owners and sole proprietors.
Become Our Featured Tax Expert.
This premium ad space is reserved for one tax professional. Put your firm in the spotlight and reach qualified U.S. leads directly.
To claim this exclusive spot, contact us at [email protected].
📘 What is FUTA?
The Federal Unemployment Tax Act (FUTA) was enacted to provide funds for paying unemployment compensation to workers who lose their jobs. It mandates that certain employers—including sole proprietors with employees—pay an unemployment tax to the IRS.
FUTA taxes support the administrative costs of state unemployment programs and partially fund unemployment benefits for eligible workers.
💼 Does FUTA Apply to Sole Proprietors?
FUTA does not apply if you are a sole proprietor with no employees. However, if you hire employees (even part-time or temporary workers), FUTA tax may apply. You must pay FUTA tax if:
- You paid $1,500 or more in wages during any calendar quarter, OR
- You had at least one employee working for some part of a day in 20 or more different weeks during the year.
🧾 What is Form 940?
Form 940 is the tax return used to report your FUTA liability. It’s an annual form, typically due by January 31 for the previous tax year. If you meet the filing requirements, you must submit this form to the IRS along with your payment.
💰 How is FUTA Tax Calculated?
The FUTA tax rate for 2025 is 6.0% on the first $7,000 of each employee’s annual wages. You may be eligible for a credit of up to 5.4% if you’ve paid your state unemployment taxes, reducing your effective federal rate to 0.6%.
For example, if you paid one employee $8,000, you’d pay FUTA tax on just the first $7,000:
- Without credit: $7,000 × 6.0% = $420
- With full credit: $7,000 × 0.6% = $42
📆 When to Deposit FUTA Tax?
If your FUTA liability exceeds $500 in a quarter, you must deposit the tax electronically through the Electronic Federal Tax Payment System (EFTPS). If your liability is below $500, you may carry it forward to the next quarter.
⚠️ Common Misconceptions
- 🛑 You do not owe FUTA tax if you only hire independent contractors (1099 workers).
- 🛑 FUTA is not withheld from employee paychecks—it’s paid entirely by the employer.
- 🛑 Filing Form 940 does not replace the need to file Forms 941 or W-2/W-3 if applicable.
Become Our Featured Tax Expert.
This premium ad space is reserved for one tax professional. Put your firm in the spotlight and reach qualified U.S. leads directly.
To claim this exclusive spot, contact us at [email protected].
🧮 How to Stay Compliant as a Sole Proprietor
- Keep accurate payroll records.
- Know your total wages paid per quarter.
- File and pay federal and state unemployment taxes on time.
- Consult a tax professional if you are unsure of your FUTA obligations.
📌 Summary for Sole Proprietors
If you are a sole proprietor in the U.S. with one or more employees, there’s a good chance FUTA tax applies to you. Ensure you file Form 940 and make timely payments to avoid penalties. Staying ahead of your payroll tax obligations protects your business and ensures your team is supported in times of economic need.
Need help? Consult a CPA or tax advisor who understands the tax challenges faced by small business owners and sole proprietors.
