SUTA and FUTA taxes are the two unemployment taxes employers pay on wages: FUTA is the federal tax that funds administration of the unemployment system and a loan fund states can borrow from, and SUTA is the state tax that pays the actual weekly benefit checks laid-off workers collect. Together they cost most employers somewhere between roughly 1% and 8% of each employee’s first several thousand dollars in wages, with the exact figure driven mostly by the employer’s layoff history and the state involved.
What Each Tax Funds and Who Pays It
FUTA revenue goes to the federal government to oversee every state’s unemployment program and to maintain a trust fund states can draw from when their reserves run low. SUTA flows into a state’s own unemployment trust fund and finances the benefits former employees receive. Every state runs its own SUTA program with its own rates, wage caps, and benefit rules.
Both taxes are overwhelmingly employer-paid. FUTA is always paid entirely by the employer. SUTA is employer-paid in 47 states, but Alaska, New Jersey, and Pennsylvania also require a small employee contribution that you must withhold from the paycheck in addition to paying the employer share.
When You Owe FUTA and SUTA
Most businesses trigger these taxes almost immediately. You owe FUTA for a given year if either of two conditions is met: you paid at least $1,500 in total wages during any calendar quarter, or you had at least one employee for any part of a day in 20 or more separate weeks during the year. The weeks need not be consecutive.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements In practice, any business with a regular employee crosses one of these lines well before year-end.
Different thresholds apply to a few categories. If you hire someone to work in your home, FUTA kicks in only when you pay $1,000 or more in cash wages to household employees in any calendar quarter.2Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide For farmworkers, FUTA applies once you pay $20,000 or more in cash wages in any quarter, or employ 10 or more farmworkers for part of a day in 20 or more different weeks in the current or preceding year.3Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Some employment falls outside FUTA entirely. Wages paid by qualifying 501(c)(3) organizations are exempt, even though the same wages remain subject to Social Security and Medicare.4Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption So is a child under 21 working for a parent, a parent working for their child, a spouse working for a spouse, and certain student workers employed by their school.5Office of the Law Revision Counsel. 26 U.S. Code 3306 – Definitions State SUTA exemptions usually mirror the federal list, but not always, so check with your state workforce agency rather than assuming a federal exemption carries over.
The FUTA Rate and the 5.4% State Credit
The gross FUTA rate is 6.0% on the first $7,000 you pay each employee during the year. Wages above $7,000 for that employee are not subject to FUTA.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements At the full rate, the maximum FUTA tax per employee would be $420, but almost no employer actually pays that.
The federal government offers a credit of up to 5.4% to employers who pay their state unemployment taxes in full and on time. That drops the effective FUTA rate to 0.6%, or a maximum of $42 per employee per year.6Internal Revenue Service. FUTA Credit Reduction The credit applies automatically to employers current on their SUTA obligations in states not borrowing from the federal trust fund. A late SUTA payment can jeopardize the credit, meaning one missed state deadline can more than double what you owe the IRS.
Credit Reduction States
When a state’s unemployment trust fund runs dry and borrows from the federal government, and that loan sits unpaid for roughly two years, the state becomes a “credit reduction state.” Employers there lose part of the 5.4% credit. The reduction starts at 0.3% in the first year and grows by another 0.3% for each additional year the debt is outstanding.6Internal Revenue Service. FUTA Credit Reduction
For the 2025 tax year filed in early 2026, California carried a credit reduction of 1.2% and the U.S. Virgin Islands carried a reduction of 4.5%. A California employer’s effective FUTA rate on the first $7,000 per employee rose to 1.8% instead of 0.6%, pushing the per-employee cost from $42 to $126. The Department of Labor publishes the list each November, and employers in affected states must file Schedule A with Form 940.7Internal Revenue Service. Schedule A (Form 940) – Multi-State Employer and Credit Reduction Information
How SUTA Rates Get Set
Your SUTA rate is personal to your business. States assign it through an experience rating system that tracks how many of your former employees have collected unemployment. Few layoffs, lower rate. Heavy turnover, higher rate. The system is built so employers absorb the cost of the instability they generate.
A new business gets a default “new employer rate” until it has enough history for an individual rating, which usually takes two to three years. Starting rates typically fall in the range of 2.7% to 4.1%, depending on state and industry. Once you have experience, the spread is wide: a stable employer in a low-rate state might pay under 0.5%, while a high-turnover employer in an aggressive state could pay above 10%. Your state workforce agency mails an annual rate notice, usually in the fall or early winter. Read it carefully. Errors happen more often than employers expect, and the appeal window is short.
Each state also sets its own taxable wage base, the cap on wages subject to SUTA per employee. A handful of states match the $7,000 federal floor, but most set the base considerably higher. As of 2026, state wage bases range from $7,000 up to $78,200 in Washington, with most states between $10,000 and $40,000. A higher wage base means SUTA applies to a much larger share of each employee’s pay.
Multi-State and Remote Workers
When an employee works in more than one state, or works remotely, a four-step test decides which state collects the SUTA tax. Apply the tests in order and stop at the first one that produces an answer:8U.S. Department of Labor. Localization of Work Provisions
- Localization. If the work is performed entirely in one state, or any out-of-state work is temporary and incidental, that state gets the tax.
- Base of operations. If the work is not localized, tax goes to the state where the employee has a fixed base of operations, provided some work is actually performed there.
- Direction and control. If there is no base of operations in a state where work is performed, tax goes to the state from which the employer directs and controls the work.
- Residence. If none of the above resolve it, tax goes to the employee’s state of residence, provided some work is performed there.
For a typical remote worker who works from home full-time, localization decides it: the home state collects. The harder cases are traveling salespeople, consultants splitting time across offices, and workers who relocate mid-year.
Filing and Deposits
FUTA is reported annually on Form 940, due January 31 of the following year. If that date falls on a weekend or federal holiday, the deadline shifts to the next business day. For 2025 the due date moved to February 2, 2026 because January 31 was a Saturday, and employers who deposited all FUTA on time during the year received an additional extension to February 10, 2026.9Internal Revenue Service. Instructions for Form 940 (2025)
During the year, deposit FUTA quarterly once your accumulated liability exceeds $500. Deposits are due by the last day of the month after the quarter ends: April 30, July 31, October 31, and January 31.10Internal Revenue Service. Employment Tax Due Dates If liability stays at $500 or less, carry it forward to the next quarter until you cross the threshold.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
Federal tax deposits must be made electronically. You can use EFTPS, IRS Direct Pay, your business tax account, or an ACH credit or same-day wire arranged through your bank.11Internal Revenue Service. Depositing and Reporting Employment Taxes Employers operating in multiple states or in a credit reduction state must include Schedule A with Form 940.
SUTA is reported separately through each state’s workforce agency, almost always quarterly, and most states now require electronic filing through their own portals. Staying current on SUTA is not only a state compliance issue: a late state payment puts your 5.4% federal credit at risk, so one missed state deadline quietly inflates your IRS bill.
Penalties for Late Deposits and Late Filing
The IRS imposes a failure-to-deposit penalty that escalates the longer you wait:12Internal Revenue Service. Failure to Deposit Penalty
- 1 to 5 calendar days late: 2% of the unpaid deposit
- 6 to 15 calendar days late: 5%
- More than 15 calendar days late: 10%
- More than 10 days after an IRS notice demanding payment: 15%
The tiers do not stack. A deposit 10 days late owes 5%, not 2% plus 5%. Interest accrues on top of whatever penalty applies.
Failing to file Form 940 at all triggers a separate penalty of 5% of the unpaid tax for each month or partial month the return is late, up to a maximum of 25%.13Internal Revenue Service. Failure to File Penalty State penalties for missed SUTA filings vary, but most states add their own late-payment penalties and interest on top of the federal consequences.
SUTA Dumping
Some employers try to game the experience rating system by creating shell companies, transferring their workforce to a new entity with a clean record, or buying a small business solely to absorb its low SUTA rate. This is called SUTA dumping, and federal law requires every state to prohibit it as a condition of receiving federal unemployment program funding.14U.S. Department of Labor. UIPL 30-04 SUTA Dumping – Amendments to Federal Law Affecting the Federal-State Unemployment Compensation Program
Consequences vary by state but can include civil fines, retroactive reassignment to the higher tax rate, and in some states criminal prosecution. These schemes are easier to detect than most employers assume, because state agencies track employer identification numbers, officer names, and payroll transfers across entities. Restructuring purely to lower your SUTA rate, with no legitimate business purpose behind it, is one of the faster ways to draw an audit.