How Are Funds From FUTA and SUTA Used?
Understand how employer-paid FUTA and SUTA taxes jointly fund and administer the United States unemployment insurance program.
The unemployment insurance system in the United States provides a financial safety net for individuals who lose their jobs through no fault of their own. This system is primarily funded through two employer-paid taxes: the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA). These taxes are distinct yet interconnected, working together to support both the administration of unemployment programs and the direct payment of benefits to eligible workers.
How FUTA Funds are Utilized
The Federal Unemployment Tax Act (FUTA) imposes a federal tax on employers for national unemployment programs. This tax is applied to the first $7,000 of wages paid to each employee annually, with a standard FUTA tax rate of 6.0%. Employers file and pay FUTA taxes quarterly or annually using IRS Form 940.
FUTA funds are not used for direct unemployment benefit payments to individuals. Instead, these funds primarily cover the federal share of administrative costs for state unemployment insurance (UI) programs. This includes expenses related to maintaining state employment agencies and processing unemployment claims.
FUTA also supports extended unemployment benefits during periods of high national unemployment. It covers half the cost of these extended benefits. FUTA funds contribute to a federal loan fund, which states can access if their state unemployment trust funds become depleted during economic downturns. Some FUTA funds may also support federal initiatives related to workforce development and job training services.
How SUTA Funds are Utilized
The State Unemployment Tax Act (SUTA) is a state-level payroll tax that employers must pay. SUTA tax rates and regulations vary by state, and these funds are deposited into each state’s unemployment fund. SUTA is the primary source for direct unemployment benefit payments to eligible individuals who have lost their jobs.
States maintain individual SUTA accounts for employers, and the tax rates are often experience-rated. This means an employer’s SUTA rate can fluctuate based on the number of former employees who have claimed unemployment benefits, with employers experiencing more claims generally paying higher rates. New employers often start with a standard state-determined rate for a period, after which their specific experience rating is applied. While SUTA funds are predominantly used for direct benefit payments, they also contribute to some state-specific administrative costs associated with managing the state’s UI trust fund and processing claims.
How FUTA and SUTA Work Together
FUTA and SUTA taxes form a coordinated system ensuring the stability and functionality of unemployment insurance nationwide. This collaboration includes the FUTA credit mechanism. Employers receive a credit of up to 5.4% against their FUTA tax liability for timely SUTA payments made to certified state UI programs, effectively reducing their net FUTA rate to 0.6% on the first $7,000 of wages. This credit incentivizes states to maintain their own unemployment insurance systems that meet federal standards.
FUTA provides the federal framework and administrative support, while SUTA supplies the direct financial assistance to unemployed workers. The federal loan fund, financed by FUTA, serves as a backup for state UI trust funds. If a state’s SUTA funds become insufficient to pay benefits during an economic downturn, the state can borrow from this federal fund. If a state has outstanding federal loans for two consecutive years and does not repay them by November 10 of the second year, employers in that state may face a reduction in their FUTA credit, resulting in a higher effective FUTA tax rate until the loan is repaid. This interdependency ensures that the unemployment insurance system remains resilient, providing financial support to workers and stabilizing the economy during periods of job loss.