How to Calculate FUTA and SUTA Taxes

The Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) create a federal-state program that provides unemployment benefits to workers who lose their jobs. These are employer-paid payroll taxes and are not withheld from employee paychecks. FUTA funds are managed by the federal government to oversee the system and provide loans to states, while SUTA taxes are paid to state agencies to fund benefit payments.

Foundational Concepts for Calculation

An employer is subject to FUTA tax if they meet one of two conditions: paying $1,500 or more in total wages in any calendar quarter, or having at least one employee for part of a day in 20 or more different weeks during the year. Once an employer meets either test, they are liable for the entire calendar year and the following one. State liability rules often mirror federal guidelines, but employers should check with their specific state agency.

The calculation for both taxes begins with identifying taxable wages, which includes salaries, hourly wages, commissions, and bonuses. Certain payments are excluded, such as health insurance contributions and specific expense reimbursements. IRS Publication 15 provides a detailed list of inclusions and exclusions.

A core concept is the wage base limit, which is the maximum amount of an employee’s annual earnings subject to the tax. The FUTA wage base is $7,000 per employee per year. Any wages paid to an employee beyond this amount are not subject to FUTA tax. SUTA wage base limits are set by each state and vary significantly.

The standard gross FUTA tax rate is 6.0%. However, employers who pay their SUTA taxes on time receive a credit of up to 5.4%, which reduces the effective FUTA rate to 0.6%. For SUTA, each state assigns a tax rate to every employer based on an “experience rating” system that considers factors like business age and unemployment claim history. New employers are assigned a standard rate that is later adjusted.

Calculating SUTA Tax Liability

The calculation for SUTA tax is the taxable wages paid to an employee for the period multiplied by the state-assigned SUTA tax rate. This is performed for each employee until their year-to-date wages exceed the state’s wage base limit. Once an employee’s earnings surpass that annual threshold, no further SUTA tax is calculated for that employee for the rest of the year.

For example, consider a business in a state with a $9,000 SUTA wage base and a 2.5% tax rate. Employee A earns $8,000 in the first quarter, and Employee B earns $10,000. For Employee A, the entire $8,000 is taxable, resulting in a SUTA liability of $200 ($8,000 x 0.025). For Employee B, only the first $9,000 is subject to the tax, making the liability $225 ($9,000 x 0.025).

In the second quarter, Employee A earns another $8,000, bringing their year-to-date wages to $16,000. Since they already had $8,000 in taxable wages, only the first $1,000 of their second-quarter earnings is needed to reach the $9,000 limit. The SUTA tax for Employee A in this quarter is $25 ($1,000 x 0.025). Employee B has already exceeded the wage base, so no additional SUTA tax is due.

Calculating FUTA Tax Liability

The FUTA tax calculation uses the federal wage base of $7,000 and the net FUTA tax rate. Assuming an employer qualifies for the full 5.4% credit for paying SUTA taxes on time, the net FUTA rate is 0.6%. The formula is the employee’s taxable FUTA wages multiplied by this net rate.

Using the same example, both Employee A and Employee B earned more than the $7,000 federal wage base in the first quarter. With a net FUTA rate of 0.6%, the FUTA tax for Employee A is $42 ($7,000 x 0.006). The FUTA tax for Employee B is also $42 ($7,000 x 0.006). Since both employees have now exceeded the federal wage base, no further FUTA tax will be due for them for the rest of the year.

The FUTA Credit Reduction

The standard FUTA calculation can change for employers in states with outstanding federal unemployment loans. When a state borrows from the federal unemployment account and does not repay the loan on time, it becomes a “FUTA credit reduction state.” For employers in these jurisdictions, the maximum FUTA credit of 5.4% is reduced, which increases their effective FUTA tax rate.

The credit reduction starts at 0.3% for the first year and can increase if the loan remains outstanding. A first-year credit reduction would lower the FUTA credit from 5.4% to 5.1%, changing the employer’s net FUTA tax rate from 0.6% to 0.9%. The Department of Labor finalizes the list of credit reduction states in November each year.

If the employer from our example were in a first-year credit reduction state, the FUTA tax for both employees would be calculated using the higher 0.9% rate. The liability for each employee would be $63 ($7,000 x 0.009), an increase of $21 per employee.

Reporting and Depositing FUTA and SUTA Taxes

Employers must follow specific reporting and deposit procedures. FUTA tax is reported annually to the IRS on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, which is due by January 31 of the following year. While the form is filed annually, tax payments are often required quarterly. If an employer’s quarterly FUTA tax liability exceeds $500, the amount must be deposited by the last day of the month following the end of the quarter.

SUTA tax reporting and payment processes are governed by individual state workforce agencies. SUTA taxes are reported and paid on a quarterly basis using state-specific forms and payment systems. Employers are responsible for knowing and meeting their state’s deadlines, as timely payment is necessary to qualify for the full FUTA tax credit.