What Is FUTA and SUTA and How Do They Work Together?

The United States unemployment insurance system provides a safety net for workers who lose their jobs. This system is funded through a combination of federal and state payroll taxes imposed on employers. These taxes, known as the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA), ensure that funds are available to provide temporary financial assistance to eligible unemployed individuals. Their combined operation supports both the administrative oversight of unemployment programs and the direct payment of benefits.

Understanding FUTA

The Federal Unemployment Tax Act (FUTA) is a federal tax levied on employers to help fund the overall unemployment insurance system. This tax primarily supports the federal government’s oversight and administrative costs for state unemployment insurance programs. It also contributes to a federal fund that states can borrow from if their own unemployment reserves become depleted during periods of high unemployment. The FUTA tax rate is generally 6.0% on the first $7,000 of wages paid to each employee annually, known as the FUTA wage base. Employers can receive a significant credit against their FUTA tax liability for timely payments made to state unemployment insurance programs, which can considerably reduce the effective FUTA rate. FUTA is exclusively an employer-paid tax.

Understanding SUTA

State Unemployment Tax Act (SUTA), also called State Unemployment Insurance (SUI), refers to the state-level payroll taxes that employers pay. SUTA directly funds unemployment benefits paid to eligible workers within each state.

SUTA tax rates and taxable wage bases vary significantly across states, reflecting different economic conditions and unemployment histories. An employer’s SUTA rate is “experience-rated,” meaning it can fluctuate based on the number of unemployment claims filed by their former employees. Employers with a history of fewer unemployment claims generally benefit from lower SUTA rates. Like FUTA, SUTA is typically an employer-paid tax, though a few states require a portion to be withheld from employee wages.

The Relationship Between FUTA and SUTA

FUTA and SUTA operate as complementary components of the unemployment insurance system, with FUTA being a federal tax and SUTA being state-specific. While both are employer-paid taxes, their interaction is designed to encourage state participation and responsibility in managing unemployment benefits.

The most significant aspect of their relationship is the FUTA credit. Employers who pay their state unemployment taxes on time can receive a credit of up to 5.4% against their FUTA tax liability. This credit effectively reduces the FUTA tax rate from 6.0% to a net rate of 0.6% on the first $7,000 of an employee’s wages. This structure incentivizes employers to comply with state unemployment tax requirements, ensuring that state programs are adequately funded for direct benefit payments. However, if a state has outstanding loans from the federal government for its unemployment fund, employers in that state may experience a FUTA credit reduction, leading to a higher effective FUTA tax rate.

Employer Obligations

Employers bear specific responsibilities concerning FUTA and SUTA to ensure compliance with federal and state regulations. Businesses must register with their state’s unemployment insurance agency to establish their SUTA account and obtain a tax rate. This registration is a prerequisite for proper state tax remittance.

Employers are required to file regular tax reports for both FUTA and SUTA, typically on a quarterly or annual basis. These reports detail wages paid and taxes owed. Employers must also make timely deposits of the calculated FUTA and SUTA taxes. Maintaining accurate records of employee wages, tax calculations, and payments is essential for verification and potential audits.