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FUTA and SUTA Taxes – What HR Leaders Need to Know
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Workforce Management

FUTA and SUTA Taxes – What HR Leaders Need to Know

One Minute Takeaway

  • FUTA is a federal tax, while SUTA is a state tax; employers are responsible for both.
  • Exemptions from FUTA and SUTA taxes exist for certain circumstances and organizations.
  • FUTA and SUTA taxes help provide financial assistance for workers who have lost their jobs.

No one is immune to unexpected unemployment, with 40% of Americans having experienced a layoff during their careers. However, the existence of FUTA and SUTA taxes ensures that workers have access to unemployment benefits, providing a crucial lifeline during challenging times.

Because employers bear the responsibility for ensuring these taxes are paid, it’s important to know the ins and outs of FUTA and SUTA taxes. Fortunately, we’ve got you covered with a helpful list of information you need to know.

What is the meaning of SUTA and FUTA?

FUTA stands for Federal Unemployment Tax Act, which was established in 1939 to fund unemployment insurance and job programs in all states for workers who lose their jobs. FUTA tax funds are allocated to support the federal government’s supervision of state unemployment insurance programs. The FUTA tax rate is 6% on the first $7,000 of each employee’s taxable wages.

The State Unemployment Tax Act, or SUTA, is a mandatory payroll tax imposed on employers to fund their state unemployment benefits program on behalf of their employees. It is also known as State Unemployment Insurance or SUI; and Reemployment tax in Florida. The SUTA tax rate is dependent on a number of variables: state, age of business, industry and history of turnover; but often follows a basic formula of wage base (x) tax rate.

These contributions, for both FUTA and SUTA, help to fund financial assistance for workers who have lost their jobs.

What is the difference between FUTA and SUTA taxes?

The main difference between FUTA and SUTA is that FUTA is a federal tax, while SUTA is a state tax. This means that FUTA taxes are paid to the federal government, while SUTA taxes are paid to the state government.

Another difference is that SUTA taxes are used to fund each state’s unemployment insurance program, for benefits to workers who are unemployed through no fault of their own or laid off due to economic reasons. Each state sets its own SUTA tax rate and taxable wage base (how much of employees’ wages receive the tax). Some states have a range of state unemployment tax rates which is updated periodically and may increase for businesses in certain industries that experience higher rates of turnover. States may also decide to change their SUTA or SUI rates annually.

FUTA taxes help provide federal support for the states’ unemployment programs and workforce agencies.

Tax TypeFUTA TaxesSUTA Taxes
Responsible PartyEmployers are responsible for paying FUTA taxes.Employers are responsible for paying SUTA taxes.
Tax RateFUTA tax rate is 6% of the first $7,000 of an employee’s wages annually.SUTA tax rates vary by state and can differ based on factors like the employer’s industry and layoff history.
Taxable Wage LimitFUTA taxes apply only to the first $7,000 of an employee’s wages for the year.SUTA taxable wage limits vary by state. Some states have no wage limit, while others impose a maximum wage limit.
Tax CreditsEmployers who pay state unemployment taxes (SUTA) may be eligible for a tax credit of up to 5.4% on their FUTA taxes, reducing the FUTA tax rate.There are no specific tax credits associated with SUTA taxes.
ReportingEmployers must report and file IRS Form 940, the Employer’s Annual Federal Unemployment Tax Return, to report and pay FUTA taxes.Employers must comply with the reporting and filing requirements of their state’s unemployment agency for SUTA taxes.
Payment ScheduleFUTA taxes must be paid quarterly if the tax liability exceeds $500. If the liability is below $500, it carries over to the next quarter.SUTA tax payment schedules vary by state, but they are often paid quarterly or annually.

Who is responsible for paying FUTA and SUTA taxes?

Employers are responsible for paying both FUTA and SUTA taxes. Employees do not handle these taxes directly. However, in Alaska, New Jersey, and Pennsylvania, employers are required to withhold SUTA taxes from employee wages and send them to the state.

Which Employers Are Exempt from FUTA and SUTA Taxes?

Most employers are required to pay both FUTA and SUTA taxes; however, exemptions do apply in sone circumstances.

Exemptions from FUTA taxes include:

  • employers who pay employees less than $1,500 in quarter,
  • employers who haven’t employed an employee for 20 weeks or more
  • 501 (c)(3) organizations

Exemptions from SUTA taxes vary by state, but may include:

  • government employers
  • nonprofit religious, charitable and educational organizations
  • businesses with only a few employees

What happens if an employer does not pay FUTA or SUTA taxes?

Employers who fail to deposit FUTA taxes can be subject to fines between 2 and 15% of their deposit, depending on when payments arrive, or in other words, how late they are. Employer penalties for nonpayment of SUTA taxes vary by state.

How Can Employers Get Help with Managing FUTA & SUTA Taxes?

Payroll software automates the process by accurately calculating the taxes based on employee wages and applicable rates. It also generates reports and facilitates electronic filing and payment of these taxes, ensuring compliance with FUTA and SUTA tax requirements.

RELATED: How to Calculate Tax Withholding

FUTA and SUTA taxes play a significant role in supporting unemployment benefits and state programs while ensuring the financial stability of the workforce. As an employer, it is important to stay informed about the rules and regulations surrounding these taxes and their impact on your business. By maintaining accurate payroll records, utilizing payroll software, and seeking expert advice when needed, employers can navigate the complexities of FUTA and SUTA taxes with confidence.

How Paycor Helps: Paycor Compliance Solutions

HR leaders already face a great deal of challenges when it comes to compliance management: from staying up-to-date with changing regulations to ensuring accurate recordkeeping and reporting. Paycor offers a comprehensive suite of tools and resources designed to alleviate these burdens. With features like real-time alerts, automated reporting, and access to expert guidance, HR leaders can streamline their compliance processes, mitigate risk, and maintain peace of mind knowing they have a trusted partner in managing their compliance obligations.

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