What Is the Difference Between FUTA and SUTA?

What is FUTA?

The Federal Unemployment Tax Act (FUTA) is a federal law that requires employers to pay taxes to fund state unemployment insurance programs. 

These programs provide temporary financial assistance to workers who lose their jobs through no fault.

The primary purpose of FUTA is to provide funding for state unemployment insurance systems. 

These programs, which define FUTA tax, are essential for helping unemployed individuals meet their basic needs while actively searching for new employment. 

By providing temporary financial assistance to unemployed individuals, unemployment insurance helps stabilize the economy during periods of economic downturn.

Tax Rates:

• The FUTA tax rate is 6% of the first $7,000 of wages paid to each employee.
• Employers must pay the FUTA tax even if they don't have to pay state unemployment taxes.
• Employers receive a credit of up to 5.4% when they file Form 940, resulting in a net FUTA tax rate of 0.6% (6.0%-5.4% = 0.6%).

What is SUTA?

The State Unemployment Tax Act (SUTA) is a state-level law that requires employers to pay taxes to fund unemployment benefits for workers who lose their jobs through no fault of their own within that specific state.

How does SUTA fund State Unemployment Programs?

SUTA taxes paid by employers in a state generate the revenue that funds the state's unemployment insurance program.

What does SUTA stand for in payroll? 

Workers who are laid off or lose their jobs can apply for unemployment benefits from the state's unemployment insurance system. 

These benefits are paid out of the SUTA fund.

Tax Rates:

• SUTA tax rates vary significantly from state to state. The rates are usually based on factors like the employer's industry, employment history, and the state's unemployment rate.
• The wage base (the maximum amount of wages subject to SUTA tax) also varies by state. This means that employers in different states might be taxed on different amounts of wages.

State Differences in SUTA:

• Some states have a flat SUTA tax rate, while others have a tiered system with different rates based on the employer's unemployment experience.
• States have different wage bases for SUTA. For example, in some states, the wage base might be $7,000, while in other states, it could be $10,000 or higher.
• Some states require employers to contribute a percentage of their payroll to the state unemployment fund, regardless of whether they have had unemployment claims.

Key Differences Between FUTA and SUTA

Several differences exist between FUTA and SUTA taxes, which are detailed in the following section.

Federal vs. State

The primary distinction between the two types of taxes is that SUTA is for state unemployment insurance, while FUTA is for federal unemployment insurance. 

While FUTA is a federal tax that supports national programs, SUTA is managed and collected by individual states. 

Suppose your employer has business in multiple US states, and you have co-workers residing in various states. Then, your company has to pay both SUTA and FUTA taxes.

Wage Base Comparison

A significant difference exists between the wage bases of FUTA and SUTA taxes. 

The FUTA tax rate is 6% of the first $7,000 annual wages paid to each employee. 

Employers pay this tax entirely, as employees do not contribute to FUTA taxes and this answers the question - ‘do employees pay futa tax’. 

Employers can receive up to 5.4% credit for their state unemployment taxes (SUTA), effectively reducing their FUTA tax rate to 0.6%.

If you’re wondering - ‘what wages are exempt from futa tax?’. Here’ the answer.

FUTA Exemptions

If you employ one or two people whose combined wage is less than $7,000, you are exempt from paying FUTA taxes as there are no earnings for them to report or withhold. 

However, you must begin paying FUTA taxes if your business expands and you hire new workers whose combined wages exceed $7,000.

Depending on your state and the amount you contribute to the system, SUTA taxes can vary. 

In most states, workers contribute a predetermined portion of their wages to pay for unemployment insurance. 

For instance, 50% of your wage will go toward paying unemployment benefits if you are a $1,000 weekly employee and the unemployment rate in your state is 5%. 

Take a look at this global guide on minimum wage by country.

Who Pays FUTA and SUTA taxes?

An employer needs to pay both FUTA and SUTA taxes to the government. 

While FUTA is paid fully by the employer, the system works a bit differently for SUTA. 

It might be shared with employees in a specific state and the employer or only the employer has to pay.

The following table shows the key points of FUTA vs. SUTA.

Employer Responsibilities and Compliance

As an employer, you must pay both FUTA and SUTA taxes. You need to follow some compliance practices or you may have to pay a fine. 

This is also the case if you make delayed tax payments. 

Here are some of the key compliance requirements for FUTA and SUTA taxes.

• Know the unique SUTA requirements for each state. The rates also vary according to state — knowledge of this can help you determine accurate tax payments.
• Conduct regular audits to ensure your payroll methods align with current government regulations. Audits can even help detect discrepancies early, thus reducing potential errors.
• Learn when and where to pay taxes. Paying taxes on time can help you avoid penalties. It will also ensure that your company has a good reputation with tax officials.
• Keep accurate records of payroll activities. Detailed documents can prove invaluable during audits or inquiries by tax authorities.

Using an EOR or payroll software for automation and compliance has several benefits, such as saving time and money. 

You can use the services of an EOR at the fractional cost of hiring dedicated staff for the same tasks. 

Read about some international business challenges as you learn more about Form 940.

Filing Requirements

Your FUTA taxes are filed quarterly if the value exceeds $500. If the value is less than $500, it carries over to the following quarter. 

So you have to pay the taxes by April 30, July 31, October 31, and January 31 of each fiscal year. 

You have to file Form 940 with the IRS. The deadline and form are the same for filing SUTA taxes.

Penalties

Late or incorrect payments of FUTA and SUTA taxes can lead to penalties. 

The penalty amount depends on the date you make the deposit. 

If you are late by 1 to 5 days, you have to pay a fine of 2%. 

In case of 6 to 15 days, the rate is 5%, while you need to pay 10% of the deposit if you are late by more than 15 days.

Have a look at some of the benefits and challenges of globalization on businesses while we give you more details on FUTA and SUTA taxes.

How to Lower FUTA and SUTA Tax Rates

It can be challenging to manage FUTA and SUTA taxes. However, by following agile practices, taxes can be lowered. 

Here are some tips to reduce tax rates.

• Focus on turnover management and try to keep it low. 
• Calculate your taxes using payroll software. This minimizes costly errors and ensures you stay updated on evolving tax laws. 
• Claim FUTA tax credits as you pay SUTA on time.
• Ensure your employees obtain workers’ compensation insurance, or you have to pay their premiums.
• Always make sure you are not left with excessive employees who do not have any work to do. 
• If you are considering hiring freelancers instead of regular workers, consider employing a freelancer who has other jobs. This way, they will not be able to claim unemployment benefits.

Turnover Management

Having a high turnover for your business may lead to an increase in SUTA rates. This happens since the rate is dependent on an experience rating. 

This rating is given by the state government to the employers. If you have an increased number of past employees who claim unemployment. 

It will negatively impact your experience rating and subsequently leave you with a high SUTA rate.

Claim FUTA Tax Credit

Paying taxes on time is a must, especially SUTA. Once you pay your SUTA on time and in full amount, you can claim a FUTA tax credit of up to 5.4%. 

This can lead to an effective FUTA tax rate of just 0.6% (6% - 5.4%). You get a huge discount of 90% on your FUTA tax. 

There’s a catch here - the percentage depends on the state you conduct business in. 

You can find out which states are eligible for the 5.4% tax credit at the end of each year from the Department of Labor. (More on credit reduction states)

Why FUTA and SUTA Matter to Workers

FUTA and SUTA taxes might seem like just another tax for employers, but they're actually to workers, especially during tough times. 

These taxes are the lifeblood of unemployment insurance programs, providing crucial financial support to individuals who have lost their jobs through no fault.

When a worker faces unexpected unemployment, state unemployment insurance, funded by FUTA and SUTA tax, provides a vital lifeline.  

It helps them pay for essential needs like rent, groceries, and utilities while seeking new employment.  

This safety net is essential for helping workers maintain their financial stability and dignity during a challenging period.

Conclusion – Manage FUTA and SUTA with Skuad

Managing and paying SUTA and FUTA taxes can be challenging for your business. 

Using an Employer of Record platform like Skuad can help businesses and HR leaders to efficiently manage these taxes. 

Using our expertise, you can ensure compliance, reduce costs, and avoid tax penalties. 

Skuad can help you reshape your company's approach to taxes and hiring new employees. Our unique hiring methods across 160 countries have helped us become a global name.

Do you want to find effective methods to approach FUTA and SUTA taxes? 

‍Talk to Skuad experts today and start your journey on a hassle-free, global hiring path.

FAQs

1) What's the difference between FUTA and SUTA?

There are multiple differences between FUTA and SUTA, ranging from the tax rate to the taxable wage base limit. The main distinction is that the federal government collects FUTA, while individual state governments collect SUTA.

2) How do I calculate Futa taxes?

You have to pay FUTA taxes for each employee at a rate of 6% on the first annual wage of $7,000. You also need to file IRS Form 940 to pay the FUTA taxes. You can claim a FUTA tax credit of 5.4% if you pay your SUTA taxes on time. This answers the question - ‘how to figure out futa tax’.

3) What does FICA do?

Many people want to know the FICA Vs FUTA differences. You already know what FUTA tax is and why it is necessary. FICA, or the Federal Insurance Contributions Act, is a US tax that automatically gets deducted from workers' paychecks. This tax goes towards funding Medicare and Social Security. FICA tax is mandatory and generally adds up to 7.65% of an employee’s wage.

4) How does Skuad help manage FUTA and SUTA taxes?

Skuad has an EOR platform that can effectively help you manage all types of taxes, such as FUTA, SUTA, and FICA. We can help you process payroll taxes and ensure compliance with tax laws. Stuck with the question - ‘how to calculate suta and futa?’ Skuad can help.

5) How do I lower FUTA and SUTA taxes?

Some of the methods to lower FUTA and SUTA taxes are:

• Maintain low turnover
• Claim FUTA tax credits
• Use a payroll software

6) Who is exempt from FUTA and SUTA?

If you’re thinking ‘what payments are exempt from futa tax’, some companies are exempted from paying these taxes, such as one whose employees earn less than $1,500 per quarter. If your company does not have to pay income tax under section 501(c)(3) of the Internal Revenue Code, then you also are exempt from FUTA.