If you have — or plan to have — team members in the US, then you will almost certainly need to pay FUTA and SUTA taxes.
But what exactly are these taxes, and what are your legal responsibilities as an employer?
In this article, we’ll explain how FUTA and SUTA taxes work, and what you need to do. So let’s jump straight in.
What are FUTA taxes?
FUTA tax is a federal levy that is imposed on nearly all US-based employers. It’s managed under the Federal Unemployment Tax Act.
These taxes are used to fund unemployment insurance programs, which provide unemployment benefits to eligible individuals who have lost their jobs.
Without the revenue generated from FUTA, out-of-work individuals can run into economic trouble quickly, which — at scale — could upend the economy.
This is why FUTA contributions are mandatory, and not optional. If your business doesn’t pay them, you could face civil fines or even criminal prosecution.
Are FUTA and FICA taxes the same?
No. Taxes under the Federal Insurance Contributions Act, or FICA, are a payroll tax applied to both employers and employees. Only employers are responsible for paying FUTA taxes.
They are also collected for different purposes. FICA taxes are designed to fund Social Security and Medicare , whereas FUTA is only for unemployment insurance.
What are SUTA taxes?
SUTA taxes are collected by state governments, as opposed to the federal government. They are managed under the State Unemployment Tax Act.
Unlike FUTA taxes — which have a consistent federal rate and wage base — SUTA tax rates and bases can differ significantly. This variability is often influenced by factors such as the number of employees a business has, and the total amount paid in taxable wages.
States may also adjust their SUTA rates periodically based on the condition of their unemployment insurance fund, and their current unemployment rate.
For employers, this means that the calculation of SUTA taxes requires a keen understanding of their state’s specific requirements and rates. This can include different wage bases or rates for different industries, or employers with varying employment histories.
What are the differences between FUTA and SUTA taxes?
The key differences between the two are as follows:
Coverage differences
The coverage of SUTA and FUTA taxes differs significantly, given their respective scopes. FUTA provides a uniform framework across all states, and sets the standard for the minimum level of unemployment insurance funding.
In contrast, SUTA taxes are more variable. This is because states have the autonomy to tailor their unemployment programs to local economic conditions and workforce needs, rather than those of the entire country.
Differences in taxable income types
There are also differences in the taxable income types.
FUTA taxes are levied on a broad base of wages, with a uniform cap across the country. Conversely, SUTA taxes encompass a wider range of income types, reflecting the diverse economic landscapes of different states. This can include varying definitions of what constitutes taxable wages, and different thresholds for employer liability.
If you have employees in multiple states, these differences can have major implications. You will need to navigate a variety of SUTA regulations and rates, adding extra complexity to your payroll and tax planning.
For each employee, you pay FUTA taxes at a rate of 6% on the first $7,000 each year.
For example, if an employee earns $60,000 per year, the FUTA tax would be 6% of $7,000 — or $420 — for the year.
However, you can claim a FUTA tax credit of up to 5.4% for FUTA taxes paid, effectively reducing the rate to 0.6%.
To avoid overpaying, include any applicable tax credits and adjustments to determine your precise tax liability.
FUTA tax payments are generally due at the end of each calendar quarter. You can make these payments directly through the IRS’s Electronic Federal Tax Payment System (EFTPS).
You will also need to submit IRS Form 940 annually to report and reconcile the year’s FUTA taxes, and to claim your tax credit.
Remote can help you manage your employment tax calculations and reporting, and ensure that you are fully compliant with all relevant state and federal tax laws.
Who doesn’t pay FUTA taxes?
US-based employers must pay FUTA taxes for almost all their team members. The two main exceptions are:
Household employees: Employees such as nannies or housekeepers are typically exempt from FUTA taxes.
Self-employed individuals: Generally, self-employed individuals — such as independent contractors — do not fall under FUTA tax requirements.
Nonprofit organizations and religious groups are also often exempt from paying SUTA and FUTA taxes.
How to calculate and pay SUTA taxes
Unlike FUTA rates, which are the same across the country, SUTA rates can vary significantly. Each state also has their own payment process, which can range from monthly to quarterly.
To see how much you will need to pay in each state, check out our free US State Explorer tool. You can also see a full breakdown of employment costs in each state — including FUTA and SUTA taxes — in our free Employee Cost Calculator tool.
Tips for managing FUTA and SUTA taxes
Managing and paying FUTA and SUTA taxes — alongside all your other tax obligations and liabilities — can be challenging, in both the financial and administrative sense. To ease the burden, you should:
Keep employee turnover low
High turnover can lead to increased SUTA rates for your business. This is because states give employers an experience rating, which impacts the rate you pay. The more former employees you have claiming unemployment, the more impact it will have on your experience rating — and the higher your rates will be.
As touched upon, the right payroll software can take all the legal and administrative work off your plate, freeing you and your team up.
Remote Payroll automates all your tax calculations, minimizing the risk of costly errors, and stays up-to-date with changing tax laws, ensuring you are always compliant. Our in-house local tax experts are also on hand to provide support and guidance when you need it.
Adhering to best compliance practices for FUTA and SUTA can make it easier to manage your responsibilities. Ensure you:
Understand the state-specific requirements for SUTA. Each state has a unique set of rules and rates, and being aware of them helps ensure accurate tax calculations and payments.
Know where and when to pay. Paying your FUTA and SUTA taxes on time avoids penalties and ensures that your business remains in good standing with tax authorities.
Conduct audits.Regular internal audits are a proactive measure for ensuring that your payroll processes align with current regulations. They can also help identify discrepancies early, preventing potentially costly errors.
Keep detailed and accurate records. Documented payroll activities leave a clear paper trail and are invaluable in case of inquiries or audits by the tax authorities.
Manage FUTA and SUTA taxes with Remote
As mentioned, Remote makes it quick, easy, and painless to monitor and manage your FUTA and SUTA taxes, as well as all your other payroll taxes, such as FICA.
We automate the calculations, stay up-to-date with all law changes, and help ensure you submit the right tax reporting forms on time. This saves you time and resources, and — crucially — gives you peace of mind that you’re fully compliant at all times.
To learn more about how it works — and how else Remote Payroll can make your entire payroll process quick, easy, and cost-effective — speak to one of our friendly experts today!
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