Who Is Responsible for Paying FUTA and SUTA Taxes?

Unemployment insurance programs serve a fundamental purpose by providing temporary financial assistance to eligible individuals who have lost their jobs through no fault of their own. These programs operate through a combination of federal and state taxes, primarily known as the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA). Understanding the distinctions between these two taxes and identifying the responsible party for their payment is important for businesses and individuals alike.

Federal Unemployment Tax Act (FUTA)

The Federal Unemployment Tax Act (FUTA) is a federal tax levied solely on employers to fund the federal share of unemployment compensation benefits and the administrative costs of state unemployment insurance programs. Employers are subject to FUTA if they paid wages of $1,500 or more in any calendar quarter during the current or preceding year. Another criterion is having at least one employee for some portion of a day in 20 or more different weeks within a calendar year, which does not require these weeks to be consecutive.

For 2025, the FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. This $7,000 amount is known as the federal wage base. Employers calculate their FUTA tax liability by applying this rate to the taxable wages paid to each employee, up to the wage base limit. For instance, an employer would pay a maximum of $420 per employee per year before considering any credits.

FUTA is exclusively an employer-paid tax; it is not withheld from employee wages. The tax applies to the first $7,000 an employee earns in a calendar year, meaning any income above this threshold for a given employee is not subject to FUTA.

State Unemployment Tax Act (SUTA)

The State Unemployment Tax Act (SUTA), often referred to as State Unemployment Insurance (SUI), is a state-level payroll tax that funds unemployment benefits for workers within each specific state. While FUTA is a uniform federal tax, SUTA rates and wage bases vary significantly from state to state, reflecting the unique economic conditions and unemployment claim histories of each jurisdiction. Employers generally become liable for SUTA when they meet thresholds similar to FUTA, such as paying a certain amount of wages in a quarter or employing a specified number of workers for a period.

A key aspect of SUTA is the “experience rating” system, which determines an employer’s specific tax rate. This system incentivizes employers to maintain stable workforces, as their SUTA rate is influenced by the amount of unemployment benefits claimed by their former employees. New employers usually start with a standard, state-determined rate before an individual experience rating is established, which can take a few years.

Employers can receive a significant credit against their FUTA tax liability by making timely SUTA payments. This FUTA credit can be up to 5.4% of the FUTA taxable wages, effectively reducing the net FUTA tax rate from 6.0% to 0.6% for most employers. However, in states that have borrowed from the federal government to fund their unemployment benefits and have not repaid these loans, employers may face a FUTA credit reduction, resulting in a higher effective FUTA tax rate. Like FUTA, SUTA is predominantly an employer-paid tax, and in most states, it is not deducted from employee wages. However, a few states, such as Alaska, New Jersey, and Pennsylvania, do require employees to contribute a portion of SUTA.

Clarifying Who Pays

The responsibility for paying both Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) taxes rests squarely and almost exclusively with employers. These taxes are a direct cost of employing workers and are not to be deducted from an employee’s gross wages.

A common misunderstanding involves the tax treatment of independent contractors versus employees. Businesses are not liable for FUTA or SUTA taxes for independent contractors. Proper classification of workers is important, as misclassifying an employee as an independent contractor can lead to significant penalties, including retroactive tax payments and interest.