FICA vs. FUTA: Employer Tax Responsibilities
Understand the key differences between FICA and FUTA to manage your employer tax responsibilities, from calculating liabilities to depositing and reporting.
Employers have two primary federal payroll tax responsibilities: the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). FICA funds federal social insurance programs, namely Social Security and Medicare, which provide benefits for retirement, disability, and medical care. FUTA works with state systems to provide unemployment compensation to workers who have lost their jobs.
Understanding FICA Taxes
The Federal Insurance Contributions Act, or FICA, is a shared tax between employees and employers that funds two programs. The first is the Social Security tax. For 2025, the Social Security tax rate is 6.2% for the employee and 6.2% for the employer. This tax applies only to earnings up to an annual limit, the wage base, which is $176,100 for 2025. Wages an employee earns above this amount are not subject to this tax.
The second part of FICA is the Medicare tax, which funds hospital insurance. The Medicare tax rate is 1.45% for the employee and 1.45% for the employer. Unlike Social Security, there is no wage base limit for the Medicare tax, and it applies to all of an employee’s covered wages.
A consideration for some employees is the Additional Medicare Tax. This tax applies only to high-income earners and is not matched by the employer. An additional 0.9% is withheld from an employee’s wages that exceed $200,000 in a calendar year, and the employer must begin this withholding in the pay period that wages surpass the threshold.
To illustrate, consider an employee earning a salary of $80,000 per year. The employer would withhold 6.2% for Social Security and 1.45% for Medicare from each paycheck. The employer would then match this 7.65% amount. Since the employee’s income is below the $200,000 threshold, the Additional Medicare Tax would not apply.
Understanding FUTA Tax
The Federal Unemployment Tax Act (FUTA) tax is paid solely by the employer. These funds support state unemployment insurance and job service programs. The standard FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the year. This means the maximum standard FUTA tax per employee is $420 annually.
Employers can receive a credit for paying their state unemployment taxes (SUTA) in full and on time. This credit can be up to 5.4% against their FUTA liability. This effectively reduces the FUTA tax rate to as low as 0.6%, making the maximum tax per employee just $42 per year.
The full credit is not always available in every state. When a state borrows funds from the federal government to cover its unemployment benefit obligations and fails to repay the loan on time, it becomes a “credit reduction state.” In these states, the FUTA credit for employers is reduced, leading to a higher effective federal unemployment tax rate until the loan is repaid.
Employer Deposit and Reporting Requirements
Employers must follow specific procedures for depositing and reporting these taxes to the IRS. The primary reporting document for FICA taxes and federal income tax withheld is Form 941, Employer’s QUARTERLY Federal Tax Return. This form is filed every three months to reconcile taxes owed with deposits made.
FUTA tax is reported separately on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form is filed once a year to calculate the total FUTA tax, account for any credit reductions, and reconcile the liability with deposits made.
Tax payments must be made electronically through the Electronic Federal Tax Payment System (EFTPS). The IRS sets either a monthly or semi-weekly deposit schedule based on an employer’s tax liability during a prior “lookback period.” For FUTA tax, deposits are required for any quarter in which the accumulated liability exceeds $500; if less, it can be carried to the next quarter.