FUTA and SUTA Taxes | Full Explanation and Main Differences

The IRS’ acronyms, FUTA and SUTA, refer to the Federal and State Unemployment Tax Act. Both aid in funding the government’s unemployment assistance compensation and programs for workers who were laid off or lost jobs.

Our tax experts at Paystub.org will explain everything you need to know about SUTA and FUTA, including the tax rates, limitations on who is exempted from paying the said taxes, and how FUTA and SUTA are paid and reported to the IRS.

Let’s begin!

Key Takeaways

• FUTA and SUTA both generate financial support for federal and state unemployment programs.
• The tax rate for FUTA is fixed at 6% and levied only on the first $7,000 of taxable wages paid to each employee.
• SUTA tax rates and wage bases vary per state—also, only three states, namely Alaska, Pennsylvania, and New Jersey, levy SUTA on both employers and employees.
• The IRS levies FUTA taxes on employers, while employers and employees cover FICA taxes. Independent contractors or self-employed individuals do not pay FUTA or SUTA taxes but must pay Medicare and Social Security taxes.

What is FUTA?

FUTA, or the Federal Unemployment Tax Act, is legislation that levies payroll taxation on employers. It is meant to help fund the government’s unemployment benefits for individuals displaced from their jobs.

Employers who have compensated their employees at least $1,500 within any quarter of the year must pay FUTA taxes.

In the same manner, a business that employs at least a single employee who completes a minimum of 20 work weeks annually must also cover FUTA tax payments.

Each state has a designated state unemployment insurance agency that ensures all the funds generated through FUTA taxes go towards providing unemployment insurance and benefits.

How Does the FUTA Rate Work?

The FUTA tax rate is fixed at 6% and applies only to the initial $7,000 wage base paid to each employee within the year. Businesses that pay state unemployment taxes are eligible for a 5.4% tax credit on their federal taxes.

Since employers pay FUTA taxes quarterly, the due dates for paying the said tax are January 31, April 30, July 31, and October 31.

Once an employer has paid FUTA taxes on the first $7,000 of an employee’s wages, they do not have to pay subsequent FUTA taxes on the rest of their staff’s earnings.

To calculate FUTA tax liability, multiply the total number of workers employed by your company by $7,000. Then, multiply the resulting value by 0.06.

For instance, you have 45 employees, each making $7,000 or more in taxable earnings annually.

The formula would look like this: (45 X $7,000) X 0.06 = 315,000 X 0.06 = $18,900. Therefore, your FUTA tax liability is $18,900. Remember to apply the 5.4% tax credit on your FUTA tax if you have paid state unemployment taxes.

Who Pays FUTA?

The Federal Unemployment Tax Act (FUTA) is paid by an employer in its entirety. This means that employees don’t have this tax withheld from their paychecks. Instead, employers must pay this tax on their own if they meet at least one of the following conditions:

• They paid at least $1,500 in wages to employees in a calendar quarter in the previous or current year.
• They had employees for at least some parts of days in 20 or more different weeks in the previous or current year.

Current FUTA Tax Rate and Wage Base

The FUTA tax rate is at a fixed 6.0% in the entire United States. However, this tax rate only applies to the first $7,000 in wages that an employee earns during a year. That means that the maximum amount of FUTA tax an employer might pay per employee is 6.0% of $7,000, or $420.

Additionally, it’s important to note that employers can receive a tax credit of up to 5.4% if they pay SUTA tax in full and on time. This means they can reduce the FUTA tax rate to a minimum of 0.6%, which comes down to a maximum of $42 per employee per year (0.6% of $7,000).

How FUTA Is Reported (Form 940)

FUTA is reported by employers using Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. The due date to file this form is January 31st; however, employers will typically receive an extension of up to ten days if they have deposited the taxes on time.

Additionally, while the Form 940 is filed once per year, payments are usually due every quarter, as long as the tax liability exceeds $500. If the amount is less than $500, it can be carried over to the next quarter until it reaches the threshold. Deposits are made through the Electronic Federal Tax Payment System (EFTPS).

How to Calculate FUTA Tax

Here’s an example of how to calculate FUTA tax for two employees, one of whom has earned $30,000 during the year and the other who has earned $5,000:

Let’s see the calculations for both employees:

• Employee 1:
  • FUTA taxable wage: $7,000
  • FUTA tax without tax credit: $7,000 * 0.06 = $420
  • FUTA tax after credit reduction of 5.4%: $7,000 * 0.006 = $42

• Employee 2:
  • FUTA taxable wage: $5,000
  • FUTA tax without tax credit: $5,000 * 0.06 = $300
  • FUTA tax after credit reduction of 5.4%: $5,000 * 0.006 = $30

Based on these calculations, the company would have to pay a total of $420 + $300 = $720 in FUTA tax in the case of no tax credit, or $42 + $30 = $72 if the company had a 5.4% tax credit reduction for paying SUTA taxes.

What is SUTA?

The State Unemployment Tax Act, or SUTA, is a type of payroll tax imposed on employers to help generate funds for the government’s state unemployment benefits.

Each state may vary regarding the SUTA tax rates, regulations, and wage bases imposed on their constituents. As such, taxpayers should consult with the state unemployment agency in their area to ensure full compliance with both federal and state laws.

Employers cover SUTA taxes solely in most states except Alaska, Pennsylvania, and New Jersey. These three states impose SUTA taxes on both employers and employees.

How Does the SUTA Rate Work?

SUTA rates refer to the unemployment benefit taxes levied among the different states. There is a clear distinction between FUTA and SUTA tax rates because SUTA tax rates differ per state. The majority of states across the US base their SUTA tax rates on the following factors:

• Industry. Some industries have a high turnover or unemployment rate compared to other sectors. Businesses with higher turnover rates must pay higher unemployment insurance claims and SUTA tax rates.

• Business’s age. New companies have a limited employment history or insufficient records to help the government determine their SUTA liability. As such, new businesses typically get lower SUTA tax rates than their more established counterparts.

• Turnover history. If an employer has been in the business for many years, their SUTA rates may or may not increase depending on whether they have high unemployment claims.

Who Pays SUTA?

SUTA taxes are generally paid by employers, similar to FUTA taxes. In most states, the responsibility falls entirely upon employers, but there are a few exceptions.

At the moment, three states require employees to contribute to SUTA taxes as well: Alaska, New Jersey, and Pennsylvania. On the other hand, some states offer SUTA exemptions to companies such as nonprofits and charities.

Lastly, while employers are required to pay SUTA taxes if they have one or more employees, the rule doesn’t apply if they work with independent contractors or employ workers who are under the age of 21.

SUTA Tax Rates and Wage Bases by State

Meanwhile, the table below shows the different SUTA tax rates per state:

Alaska levies 0.5% for employee SUTA coverage, New Jersey 0.425%, and Pennsylvania 0.07%.

How Is SUTA Reported?

SUTA is reported differently in every state. Employers must comply with the rules and regulations of their state’s unemployment agency.

In general, most states require employers to pay SUTA taxes and file returns quarterly. The payments are typically due at the end of each calendar quarter (e.g., April 30, July 31, October 31, and January 31).

Due to differences between states, it’s essential to check with your state’s unemployment agency for specific dates and procedures. At a minimum, you need to have an unemployment tax account. Also, you can usually file SUTA taxes electronically.

Example SUTA Calculation

To calculate SUTA taxes, you multiply each employee’s taxable wage (up to your state’s taxable wage base) by your SUTA tax rate. To do that, you need to know the taxable wage base in your state and your assigned tax rate as an employer.

Taxable wage base varies between states. For instance, in California, it remains $7,000, the same as the FUTA wage base, whereas in Washington, it has increased to $72,800.

Similarly, rates vary between states while also depending on factors such as the business’s industry and experience rating.

Here’s an example of an employer calculating SUTA taxes in California, where the taxable wage base is $7,000 and the tax rate is 3.4%:

• Employee 1, who earned $10,000 during the year:
  • SUTA taxable wage: $7,000
  • SUTA tax for the employee: $7,000 * 0.034 = $238

• Employee 2, who earned $5,000 during the year:
  • SUTA taxable wage: $5,000
  • SUTA tax for the employee: $5,000 * 0.034 = $170

In total, SUTA tax liability for the employer amounts to $238 + $170 = $408 for both employees.

Key Differences Between FUTA and SUTA

Now that you understand both FUTA and SUTA taxes, let’s sum up the main differences between them using a table:

Who is Exempt From Paying FUTA and SUTA Taxes?

Several types of employers and organizations are exempt from paying FUTA and SUTA taxes, including:

• 501(c)(3) organizations. Organizations exempt under the Internal Revenue Code, section 501(c)(3), are exempt from paying FUTA and SUTA taxes. This includes public charities, but also various religious, scientific, educational, and literary organizations.

• Government entities. Most government employers, whether federal, state, or local, are exempt from these taxes.

• Some household employers. If you have household workers (e.g., nannies) who you’re paying under $1,000 in a quarter, you may be exempt from paying FUTA and SUTA taxes.

• Some agricultural employers. In some cases (e.g., if you’ve paid wages below a certain threshold or had fewer than 10 workers employed), agricultural employers may be exempt from these taxes.

• Family member wages. If you’re employing a spouse or a parent, as well as a child under the age of 21, their wages are usually exempt from FUTA tax.

• Railroad employers. Railroad employers are subject to RUIA (Railroad Unemployment Insurance Act) and, as such, are exempt from FUTA tax.

• Various foreign governments and international organizations.

This also applies to businesses that have not employed new staff in 20 weeks or more. Additionally, employers who pay less than $1,500 worth of taxable wages to their employees every quarter also don’t need to include SUTA or FUTA taxes when calculating their payroll taxes.

Lastly, while most of these exceptions apply to both FUTA and SUTA taxes, it’s important to know that SUTA exemptions vary by state. In some cases, they can be significantly different from FUTA exemptions, making it essential to familiarize yourself with the laws in your state.

How to Pay & Report FUTA and SUTA

Here’s how to approach paying and reporting FUTA and SUTA taxes:

FUTA Taxes

You can pay your FUTA taxes by depositing the amount electronically at the end of the month following the end of a quarter. You can do it through the IRS electronic funds transfer.

Next, you must also file the correct tax form, Form 940; you can do that electronically, too, by checking out your e-filing options on the official website of the IRS.

SUTA Taxes

There are several considerations when paying and reporting SUTA taxes. Specifically, if an employer has offices and staff based in different states, they are obliged to pay SUTA taxes in all the states where they assign employees.

Employees working in multiple states must specifically pay SUTA taxes in the states where they receive instructions or directions from their employer. They must also pay state unemployment taxes in the state where they have an office for their job.

FUTA vs. FICA Taxes

The main difference between FUTA vs. FICA taxes is in the party that pays each payroll tax. The IRS levies FUTA taxes on employers, while employers and employees pay FICA taxes.

Here are a few more critical distinctions between FUTA and FICA:

• FUTA taxes help fund the government’s unemployment insurance programs, while FICA aids in sustaining federal Medicare and Social Security programs.

• With FICA taxes, the IRS imposes a wage base limit solely on Social Security taxes. For Medicare, all covered employee earnings are subject to Medicare taxation.

• Self-employed individuals must not pay FUTA tax, but they have to pay Social Security and Medicare taxes.

• All FICA taxes withheld from employees’ salaries are reflected on their Form W-2.

SUTA vs. SUI

There is no distinction between SUTA and SUI because both refer to the same payroll tax. SUI (State Unemployment Insurance) refers to the same payroll tax as SUTA, but each state may use different terms to refer to state unemployment taxes.

Other alternative terms used in place of SUTA and SUI include re-employment and unemployment benefit taxes.

Common Mistakes to Avoid With FUTA and SUTA

Let’s go through some of the most common mistakes you can make when paying and reporting FUTA and SUTA taxes. Familiarizing yourself with these mistakes is essential for avoiding them, as they can lead to penalties and interest charges.

Forgetting Wage Base Limits

A common mistake employers make is forgetting wage base limits and using the wrong numbers in their calculations.

For instance, the FUTA tax only applies to the first $7,000 an employee earns, and paying taxes beyond this threshold will result in the employer overpaying. On the other hand, failing to keep track of when the employee earns $7,000 can result in underpaying the FUTA tax.

When it comes to SUTA taxes, it’s essential to know the correct wage base limit in the state where you work. This is particularly important for employers who operate in multiple states, as wage base limits can vary significantly.

Using Incorrect Rates

Using incorrect rates is another common error employers make when paying and filing FUTA and SUTA taxes. While the standard rate for FUTA is 6.0%, most employers who also pay SUTA tax can reduce the rate by 5.4% to avoid overpaying the tax.

However, the reduction rate can be lowered if an employer is in the “credit reduction state.” If their state has outstanding federal unemployment loans, their FUTA tax rate may be higher than 0.6% after applying the SUTA credit.

Keeping track of SUTA rates is even more complex, as they vary by state and are determined by factors such as industry and experience rating.

Late Payments or Underpayments

FUTA and SUTA taxes come with clear thresholds and deadlines for payments. Being late with deposits or Form 940 filing can incur penalties that can range from 2% to 15% for FUTA taxes, for instance.

SUTA taxes are accompanied by similar fixed or percentage-based penalties, which vary by state. Consistently making the same mistakes, whether with late payments or underpayments, can exacerbate the situation, leading to increased fines and even legal action by the state.

How FUTA and SUTA Show Up in Pay Stubs and Tax Forms

Understanding how FUTA and SUTA show up in pay stubs and tax forms is important for both employers and employees, even though this is mainly an employer’s expense.

Since FUTA and (in most cases) SUTA are employer-paid taxes, they aren’t withheld from employees’ paychecks. As a result, they usually won’t be in the “deductions” section of a pay stub. The exceptions are Alaska, New Jersey, and Pennsylvania, where employees also contribute to SUTA tax. In these states, SUTA withholding can appear on pay stubs.

Following that, FUTA and SUTA taxes also don’t appear on Form W-2, Wage and Tax Statement. Employers use these forms to report how much they paid their employees in wages and how much tax they withheld for them. Since neither FUTA nor SUTA is withheld (unlike federal income tax, Social Security, and Medicare), they aren’t directly reported on Form W-2.

However, the total wages reported in Box 1 (Wages, tips, other compensation) are used as a starting point for calculating FUTA and SUTA taxes. Still, employers are required to internally keep track of wages distributed and taxes paid to ensure compliance and successfully file Form 940 and state unemployment tax returns.

Finally, it’s important to know that FUTA and SUTA taxes aren’t paid for independent contractors and 1099 workers. These professionals are responsible for their own self-employment and income taxes.

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The generator comes with intuitive controls and a built-in calculator that uses rates and hours to automatically sum up gross and net pay. Moreover, it allows you to add custom earnings and deductions, and it even automatically includes SUI/SUTA if you’re in a state where you need to withhold it from an employee’s salary.

Final Thoughts

Now that you know the meaning of FUTA and SUTA and the different regulations governing each tax, you can better prepare your business expenses in time to file all your tax obligations.

Note the deadlines and tax forms needed to report and pay your FUTA and SUTA taxes. Additionally, stay updated with any relevant changes that may increase or decrease your taxes due.

FUTA and SUTA FAQ

#1. What happens if an employer doesn’t pay FUTA and SUTA taxes?

An employer who does not pay FUTA and SUTA taxes will face a 2% to 15% payroll tax penalty.

Penalty costs depend on the amount of taxes the employer owes, the business size, and the number of days since the FUTA and SUTA taxes remain unpaid after the due date.

#2. Is FUTA tax-deductible?

Yes, FUTA is tax-deductible. Businesses or employers can deduct the amount paid to cover FUTA taxes from the state unemployment taxes they still owe. However, businesses must first verify their area's applicable state and federal tax deduction policies.

#3. Do self-employed people pay FUTA and SUTA taxes?

No, self-employed individuals do not pay FUTA and SUTA taxes. They are exempted from federal and state unemployment taxation even if a business employs their services contractually.

#4. Can FUTA and SUTA taxes be lowered?

Yes, FUTA and SUTA taxes can be lowered under specific circumstances. The FUTA tax rate can be reduced from 6.0% to 0.6% with a SUTA-related credit. SUTA taxes can potentially be reduced by lowering employer turnover or making voluntary contributions to the state unemployment insurance fund.