Taxes are a fundamental part of running a business, and understanding employer tax obligations is critical to remaining compliant with federal and state regulations. Two employment-related taxes that often cause confusion are FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) taxes. These taxes are essential for funding unemployment benefits for workers who lose their jobs through no fault of their own.
Although these taxes both fund unemployment compensation, they differ in their calculation methods, who is responsible for paying them, and their impact on businesses. Understanding these taxes can help employers avoid penalties, manage tax costs, and stay compliant with federal and state regulations.
What Is FUTA Tax?
The Federal Unemployment Tax Act (FUTA) is a federal payroll tax that employers pay to fund unemployment benefits at the national level. This tax helps support state unemployment programs and covers administrative costs for running unemployment systems nationwide.
FUTA ensures that state unemployment agencies have the resources to provide temporary financial assistance to unemployed workers. It also funds extended unemployment benefits during economic downturns when states may run out of money.
Key details of FUTA tax:
- Who pays it? Only employers pay FUTA tax. Employees are not responsible for contributing.
- 2025 FUTA tax rate: The standard rate remains 6.0% on the first $7,000 of each employee’s annual wages.
- Potential FUTA tax credit: Employers who fully pay their SUTA taxes on time can receive a tax credit of up to 5.4%, reducing their effective FUTA rate to 0.6%.
- Purpose of FUTA: These funds go toward unemployment insurance (UI) programs and help states during high unemployment periods when state funds are depleted.
What Is SUTA Tax?
The State Unemployment Tax Act (SUTA) is a state-mandated payroll tax that funds unemployment benefits for eligible workers within that specific state. Unlike FUTA, SUTA tax rates, rules, and wage bases vary by state.
SUTA taxes directly fund state unemployment benefits for workers who lose their jobs through no fault of their own. These programs ensure financial stability for workers while they search for new employment.
Key details of SUTA tax:
- Who pays it? Employers are responsible for SUTA taxes, though in some states (like Pennsylvania, New Jersey, and Alaska), employees also contribute.
- Tax rates vary by state: SUTA rates depend on state laws, employer industry, and individual employer experience ratings (how often they’ve had former employees claim unemployment).
- State-specific wage base limits: Unlike FUTA, which has a fixed wage base of $7,000, each state sets its own wage base for SUTA tax. In 2025, these limits range from $7,000 to over $50,000, depending on the state.
- Purpose of SUTA: These funds are used to provide unemployment benefits to workers in that specific state.
Key Differences Between FUTA And SUTA
Why Employers Must Stay Compliant
Employers must accurately calculate, report, and pay FUTA and SUTA taxes to avoid penalties, interest, and increased tax liabilities. FUTA credit reductions can occur if a state fails to repay federal loans for unemployment benefits, leading to higher FUTA tax liabilities for employers. Frequent layoffs can increase an employer's SUTA tax rate due to a higher "experience rating," resulting in higher state unemployment taxes.
Late payments, incorrect filings, or misclassifying employees can lead to severe penalties from the IRS and state agencies, including fines, interest, and even criminal charges. States with outstanding federal loans may face FUTA credit reductions, causing employers to owe more in FUTA taxes until the loan is repaid. Ensuring compliance with FUTA and SUTA tax requirements is essential to avoid these costly consequences.
How to Ensure Compliance
- Stay updated on state tax rates: Because SUTA rates and wage bases change annually, employers should monitor state updates.
- File reports on time: FUTA taxes are reported quarterly using IRS Form 940, while SUTA filings vary by state.
- Work with a payroll partner: Outsourcing payroll tax management to a professional employer organization (PEO) ensures compliance and reduces the risk of penalties.
How GMS Can Help
Managing unemployment taxes can be challenging, especially for multi-state employers navigating different SUTA rates and regulations. Group Management Services (GMS) helps businesses:
- Accurately calculate and file FUTA and SUTA taxes
- Stay compliant with state and federal tax laws
- Reduce their SUTA tax burden through proper claims management and best practices
GMS can provide expert guidance and comprehensive payroll services if you’re unsure about your company’s FUTA or SUTA tax obligations. Contact us today to learn how we can simplify payroll tax management for your business.