2016 FUTA Tax Rate & Wage Base
The 2016 FUTA Tax Rate & Wage Base is $7,000.
Effective 2016-01-01Source: 2016 Instructions for Form 940 (IRS)Verified 2026-09-03
Who it applies to
Employers who file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
What changed this year, and why
For 2016, the Federal Unemployment Tax Act (FUTA) wage base is $7,000 per employee.
Common questions
- What is the FUTA wage base?
- The FUTA wage base for 2016 was $7,000. Only the first $7,000 in wages paid to each employee during the calendar year, after subtracting any payments exempt from FUTA tax, was subject to the federal unemployment tax.
The $1,500 quarter test and the 20 week test
For 2016, you must file Form 940 if either of two tests is met during 2015 or 2016. The first test asks whether you paid wages of $1,500 or more to employees in any single calendar quarter. The second test asks whether you had at least one employee for some part of a day in 20 or more different weeks. When counting weeks, include all full-time, part-time, and temporary employees, but do not count partners in a partnership. Meeting either test triggers the filing obligation; you do not need to meet both. If your business was sold or transferred during the year, each employer who meets at least one of these tests must file its own Form 940, and wages paid by a predecessor employer are excluded unless you qualify as a successor employer. The $7,000 wage base applies separately to each employee once filing is required.
Except as noted below, if you answer “Yes” to either one of these questions, you must file Form 940. Did you pay wages of $1,500 or more to employees in any calendar quarter during 2015 or 2016? Did you have one or more employees for at least some part of a day in any 20 or more different weeks in 2015 or 20 or more different weeks in 2016? Count all full-time, part-time, and temporary employees.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
The rate charged on the wage base, and the state credit against it
The FUTA tax rate for 2016 is 6.0% applied to the first $7,000 of wages paid to each employee during the calendar year. Most employers receive a maximum credit of up to 5.4% against this federal tax for state unemployment taxes they have paid. The credit is available only if the employer pays all required state unemployment contributions on time and in full. Employers must calculate their quarterly tax liability by determining how much of the $7,000 wage base was paid to each employee in each quarter and applying the 6.0% rate, then claiming the 5.4% credit. The difference between the 6.0% gross rate and the 5.4% credit determines the net deposit amount due each quarter. You figure your tax liability for the quarter by adding the first $7,000 of each employee's annual wages paid during the quarter and multiplying by the applicable rate.
The FUTA tax is 6.0% (0.060) for 2016. Most employers receive a maximum credit of up to 5.4% (0.054) against this FUTA tax. Every quarter, you must figure how much of the first $7,000 of each employee's annual wages you paid during that quarter.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
Why employers in some states pay more
Federal unemployment tax is cheap for most employers because they get a credit for what they pay into their state system. That credit shrinks where the state's unemployment fund still owes the federal government for borrowing it has not paid back, and such a state is called a credit reduction state. Which states carry the label is settled by the Department of Labor, not by the employer and not by the state. The whole effect lands on the federal bill: two employers paying identical wages on the same $7,000 wage base owe different amounts of federal unemployment tax purely because of where the work was done. Nothing changes for the employee, and nothing changes in what the employer pays the state. What pulls an employer in is where its payroll falls under state unemployment law, so a business operating across several states can be caught in some of them and not others, and works the extra tax out state by state when it files Form 940 for 2016.
Credit reduction state. A state that hasn't repaid money it borrowed from the federal government to pay unemployment benefits is a “credit reduction state.” The Department of Labor determines these states. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940. For 2016, there are credit reduction states. If you paid any wages that are subject to the unemployment compensation laws of a credit reduction state, your credit against federal unemployment tax will be reduced based on the credit reduction rate for that credit reduction state.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
Household employers are tested separately
Household employers face a different filing threshold than other employers. A household employer must pay FUTA tax on wages paid to household employees only if cash wages of $1,000 or more were paid in any calendar quarter in 2015 or 2016. This quarterly dollar test is the sole threshold for household employers; they are not subject to the separate multi-week test that applies to other employers. A household employee performs household work in a private home, a local college club, or a local chapter of a college fraternity or sorority. Generally, employers of household employees must file Schedule H (Form 1040) instead of Form 940. However, if you have employees who are not household employees in addition to your household workers, you can choose to include the FUTA taxes for your household employees on Form 940 rather than filing separate returns.
If you’re a household employer, you must pay FUTA tax on wages that you paid to your household employees only if you paid cash wages of $1,000 or more in any calendar quarter in 2015 or 2016.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
The $500 rule that decides when you deposit
Even though Form 940 covers a full calendar year, you may have to deposit your FUTA tax before filing your return. If your total FUTA tax for the calendar year is more than $500, you must deposit at least one quarterly payment. You determine when to deposit based on your quarterly tax liability. If your FUTA tax is $500 or less in a quarter, you carry it over to the next quarter. You continue carrying the liability forward until your cumulative tax exceeds $500. At that point, you must deposit your tax by the last day of the month after the end of the quarter. If your tax for the next quarter is $500 or less, you are not required to deposit again until the cumulative amount is more than $500. If your total FUTA tax for the year is $500 or less, you do not need to make any deposits and simply pay with your return.
If your FUTA tax is more than $500 for the calendar year, you must deposit at least one quarterly payment. You must determine when to deposit your tax based on the amount of your quarterly tax liability. If your FUTA tax is $500 or less in a quarter, carry it over to the next quarter.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
Deposits have to be electronic, not mailed
All federal tax deposits, including FUTA tax, must be made electronically through the Electronic Federal Tax Payment System (EFTPS). Taxpayers cannot mail a check or use any other method. If a business is new, the IRS automatically pre-enrolls it in EFTPS when it applies for an Employer Identification Number (EIN). To enroll or get more information, taxpayers can visit the EFTPS website at www.eftps.gov or call the EFTPS toll-free numbers. Additional details about the electronic payment system are available in Publication 966. This requirement applies to every federal tax deposit, regardless of the amount or the type of tax.
You must use EFT to make all federal tax deposits. Generally, an EFT is made using EFTPS.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
An overpayment is not lost: refund it or apply it forward
If an employer deposits more FUTA tax than is owed for the year, the overpayment is not lost. The employer may choose to have the IRS apply the overpayment as a credit to the next year's return or send a refund. On line 15 of Form 940, the employer checks the appropriate box to indicate which option is selected. If neither box is checked, the IRS will automatically issue a refund, less any amounts applied to past-due tax accounts under the employer's EIN. For overpayments that are very small - less than a dollar - a refund or credit is issued only if the employer requests it in writing.
If you deposited more than the FUTA tax due for the year, you may choose to have us either: Apply the refund to your next return, or Send you a refund. Check the appropriate box in line 15 to tell us which option you select. If you don't check either box, we will automatically refund your overpayment, less any amount we apply to any past due tax account shown in our records under your EIN. If line 15 is less than $1, we will send you a refund or apply it to your next return only if you ask for it in writing.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
Filing with the wrong EIN can cost you penalties, not just a processing delay
Employers must ensure the EIN on their Form 940 matches exactly what the IRS assigned. Using a Social Security Number or ITIN in place of an EIN is not allowed on this form. Filing with an incorrect EIN, or using an EIN that belongs to another business, can trigger penalties and slow the processing of the return. The IRS requires that the EIN be accurate because the account is tied to that number for deposit credits and refund purposes.
Filing a Form 940 with an incorrect EIN or using the EIN of another's business may result in penalties and delays in processing your return.
2016 Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS)
How each figure was verified
Each number below was read from a stored copy of the document named beside it, and checked to occur word for word in the quoted sentence. The digest is of that stored text.
2016 Instructions for Form 940 (IRS)
- Wage base
This $7,000 is called the FUTA wage base.