Losing a job is always a hardship for any individual. What sometimes gets overlooked in those moments is the potential setback for every part of the economy that an individual touches. Missed payments for housing or utilities, strains on public services, and the decline in consumer spending is a drag on the economy which can add up, depending on the scale of the problem.

That is why unemployment insurance was instituted in 1939, during the Great Depression. This financial bridge across periods of displacement helps people get back to being full contributors faster and helps make bumps in the economy less disruptive overall.

So, even though the funding of the programs is characterized as a tax, and the benefits are often seen as a form of government charity, FUTA and SUTA are macroeconomic insurance policies. This article explains how they work.

Worried about tax accuracy? Check out Common Tax Errors and Tips for Employers.

What Is FUTA? 

The Federal Unemployment Tax Act (FUTA) serves two functions: Providing baseline benefits for displaced workers across all the states and maintaining reserves in case of widespread dislocations; and, funding administration of the distribution of the benefits through the states.

FUTA also mandates the establishment of unemployment insurance programs at the state level. These state funds will be discussed later in this article. The thing to note here is that – because the federal law mandates the state funds, coordinates with them, and contributes to them – they can sometimes get confused with one another. They are closely related, but they are different.

Since FUTA supplies the foundation for unemployment insurance programs nationwide, it is a form of economic infrastructure. So only employers are responsible for paying this tax to maintain a healthy and stable business environment. Employees do not contribute to FUTA.

Generally, employers must pay both state and Federal unemployment taxes if: (1) they pay wages to employees totaling $1,500 or more in any quarter of a calendar year; or (2) they had at least one employee during any day of a week during 20 weeks in a calendar year, regardless of whether or not the weeks were consecutive. However, some state laws differ from the Federal law and employers should contact their state workforce agencies to learn the exact requirements.

The FUTA tax rate is 6.0% of an employer’s taxable wages. The taxable wage base is the first $7,000 paid in wages to each employee during a calendar year. Offset credits are available which can reduce a company’s FUTA tax liability, but these vary by state. Consult with a tax or payroll specialist to learn what is available in your operating territories.

An employer’s FUTA tax liability must be calculated each quarter. The amount of that tax liability determines when they must pay. If the total FUTA tax for all employees for the quarter is $500 or less, the employer can carry the liability over until the cumulative amount is $500 or more. The payment is due at the end of the first month following that quarter. In addition, a form 940 must be filed annually by January 31 reporting the employer’s FUTA tax liability and payments made during the previous year.

Only an organization that is exempt from income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA. This exemption cannot be waived. As noted above, employees do not pay this tax nor have it withheld from their pay.

Getting ready to file your taxes? Review our Year-End Payroll Checklist

What Is SUTA?

The State Unemployment Tax Act (SUTA) is the state component of the national unemployment insurance program. It may also be called State Unemployment Insurance (SUI), Reemployment Tax, or Employment Security Tax, depending on what state(s) you do business in.

As discussed above, state programs are partially funded by the federal government through FUTA. However, each state is free to devise its own program on top of the federal mandates. Unemployment services and benefits are delivered at the state level. For this reason, SUTA rates vary by state and may be adjusted from time to time.

Be aware, especially if you employ people in multiple states: The rates can vary widely. For example, the wage base in 2024 for Washington State was $68,500 while the base was just $7,000 in Arkansas, California, Florida, and Tennessee. The wage base is the maximum taxable compensation; wages paid over the base are not subject to SUTA.

Tax rates can vary from a minimum of 0.06% in Georgia, Michigan, and North and South Carolina to a maximum of 10.37% in Pennsylvania. Some states have one schedule for new companies that have just registered as employers in that state and a different schedule for established companies. Some also have different rates for certain kinds of businesses like construction companies or those that handle hazardous materials.

Each state also offers its own exemptions. Religious and charitable organizations and certain types of trades or professions may be exempt from the SUTA tax in any particular state. On the other hand, employees may be required to contribute to SUTA, though only three states currently have this requirement: Alaska, New Jersey, and Pennsylvania.

SUTA taxes are typically due by the last day of the month following the end of each quarter and are paid directly to the state. Working closely with a tax or payroll specialist is the best way to ensure you are paying the correct rates on the correct base and your business stays compliant.

Worried about your payroll’s compliance? Read Payroll Compliance Checklist: Your Guide To Not Getting Sued

Ensure Tax Compliance with VensureHR

Of all the complexities of being an employer, tax compliance can be the most frustrating. When you see two different but related tax levies assessed for each of your employees, this only amplifies the frustration.

This is the price advanced economies pay to have a stable business sector with a healthy pool of skilled labor. It also helps to have skilled payroll, tax, and employment professionals on your side. That’s where VensureHR’s payroll solutions come in.

We leverage advanced technologies to keep businesses compliant with precise payroll and tax withholdings, including FUTA and SUTA in all 50 states. We track every change in the codes of every state to ensure accuracy and completeness. We now process $60B in annual payroll across all our clients.

If you could use help with your payroll or just want to make sure you’re not paying more than you should, contact us to schedule a payroll services consultation today.