What Are SUTA and FUTA? Employer Tax Responsibilities

The unemployment insurance system in the United States relies on two employer-paid taxes: the State Unemployment Tax Act (SUTA) and the Federal Unemployment Tax Act (FUTA). These taxes fund benefits for eligible workers who experience unemployment. Most employers contribute to both.

Understanding State Unemployment Tax (SUTA)

SUTA is a state-specific payroll tax that funds unemployment benefits for eligible workers. This tax provides temporary financial relief to individuals actively seeking new employment after losing a job through no fault of their own. Only employers are generally responsible for paying SUTA, though a few states require employee contributions.

Each state establishes its own taxable wage base, the maximum annual wages subject to SUTA tax. This wage base varies significantly across states, from a few thousand dollars to tens of thousands of dollars per employee.

SUTA tax rates are state-specific and determined by an “experience rating” system. An employer’s rate fluctuates based on their history of unemployment claims; businesses with fewer claims typically receive lower rates. New employers generally begin with a standard rate, which adjusts over time based on their experience. To calculate SUTA tax, an employer multiplies the taxable wages (up to the state’s wage base) by their assigned state tax rate.

Understanding Federal Unemployment Tax (FUTA)

FUTA is a federal payroll tax levied on employers to fund unemployment benefits. This tax contributes to the federal share of unemployment benefits and supports the administration of state unemployment programs. FUTA is paid solely by employers and is not withheld from employee wages.

The FUTA tax applies to the first $7,000 of wages paid to each employee annually. The standard FUTA tax rate is 6.0% of these taxable wages. Employers can receive a credit of up to 5.4% against their FUTA tax liability by paying state unemployment taxes on time. This credit reduces the net FUTA tax rate for most employers to 0.6%.

States are designated as “credit reduction states” if they have outstanding federal loans for unemployment benefits. Employers in these states receive a lower FUTA tax credit, leading to a higher effective FUTA tax rate. FUTA tax is calculated by multiplying the first $7,000 of an employee’s wages by the employer’s effective FUTA tax rate, which is 0.6% after the SUTA credit.

Fulfilling Your Unemployment Tax Obligations

Employers must register with their state unemployment agency and the Internal Revenue Service (IRS). This registration ensures proper accounts are established for reporting and payment. Maintaining accurate records of wages paid and taxes remitted is important for compliance.

SUTA wages and taxes are reported to the state unemployment agency quarterly. Each state provides specific forms for this purpose, such as state unemployment tax returns. FUTA taxes are reported annually to the IRS using Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form summarizes the employer’s FUTA tax liability for the calendar year.

While Form 940 is an annual return, FUTA tax payments are required more frequently if the accumulated liability exceeds a certain threshold, such as $500. Employers must deposit these taxes quarterly. Quarterly deposits are due by the last day of the month following the end of each calendar quarter.

SUTA payments are also due quarterly to the state. Common payment methods include electronic funds transfer (EFTPS for federal taxes) and state-specific online portals. Failure to file or pay these taxes on time can result in penalties and interest charges.