What Is the Difference Between FUTA and FICA Taxes?
Understand the key distinctions between federal payroll taxes. Learn how FICA and FUTA differ in purpose, funding structure, and employer vs. employee liability.
Employers are responsible for several payroll taxes, including two distinct federal taxes: the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). These taxes are governed by different laws, fund separate government programs, and have unique rules for calculation and payment. Understanding the differences is a part of payroll management.
Federal Insurance Contributions Act (FICA)
The Federal Insurance Contributions Act (FICA) is a federal payroll tax that funds Social Security and Medicare. Social Security provides retirement, disability, and survivor benefits, while Medicare is a health insurance program primarily for individuals aged 65 or older. The financial obligation for FICA is shared between the employee and the employer.
The tax has two parts. For 2025, the Social Security tax rate is 6.2% for both the employee and employer, for a total of 12.4%. This tax applies only up to an annual wage base of $176,100. The Medicare tax rate is 1.45% for both parties, totaling 2.9%, with no wage limit.
An employer withholds the employee’s share of FICA from their paycheck and is responsible for paying a matching amount. For example, if an employee earns $2,000 in a pay period under the Social Security wage base, the employer would withhold $124 for Social Security and $29 for Medicare. The employer then pays an additional $153 as its matching share. An Additional Medicare Tax of 0.9% must be withheld from an employee’s wages that exceed $200,000 in a calendar year, though there is no employer match for this portion.
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act (FUTA) establishes a tax paid solely by employers to fund state workforce agencies and unemployment insurance programs. Unlike FICA, employees do not pay FUTA tax, and it is not withheld from their wages.
The FUTA tax rate is 6.0%, applied to the first $7,000 of wages paid to each employee during the year. This means the maximum standard tax an employer pays per employee is $420 annually. Once an employee’s wages exceed $7,000 for the year, the employer has no further FUTA liability for that individual.
Employers can receive a tax credit of up to 5.4% against their FUTA liability if they pay their state unemployment taxes (SUTA) on time. This credit reduces the effective FUTA rate to 0.6% for most employers, lowering the maximum annual tax per employee to $42. If a state has outstanding federal loans for its unemployment program, employers in that state may face a FUTA credit reduction.
Tax Deposit and Reporting Requirements
Employers are required to deposit FICA and FUTA taxes electronically through the Electronic Federal Tax Payment System (EFTPS). The frequency of these deposits depends on the employer’s total tax liability during a specific lookback period. Based on this lookback, an employer is classified as either a monthly or semi-weekly depositor.
FICA taxes are reported on Form 941, the Employer’s Quarterly Federal Tax Return. This form is used to report Social Security and Medicare taxes for both the employee and employer, along with any federal income tax withheld, and to reconcile the liability with deposits for the quarter.
FUTA taxes are reported separately on Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. While the form is filed once a year, FUTA tax deposits are typically made quarterly if the amount due exceeds $500. Form 940 is used to calculate the total FUTA tax and reconcile it with deposits made during the year.