FUTA and SUTA

Q. As a small business owner looking forward to processing my own payroll, I am curious about FUTA and SUTA and how the calculation works.

A. First, congratulations on taking the step toward hiring employees. It can be both a good thing, because you are growing, and a bad thing, because employees bring new challenges to the business. To get started, let me say that all discussions regarding federal level taxes and withholdings that are the responsibility of the employer can be found in IRS Publication 15. FUTA is also discussed there.

FUTA stands for “Federal Unemployment Tax Act” and is a tax paid on the wages of employees by the employer. The tax is 6.2% of employee wages up to $7000 per employee. That equates to $434 per person per year. There is relief from this rate built in to the calculation. Per Pub 15, “Generally you can take a credit against your FUTA tax for amounts that you paid into state unemployment funds”. The credit is up to 5.4% which leaves your FUTA tax rate at .8% or $56 per employee per year. The credit has some stipulations and your state has to be in the good graces of the federal government for that to work. New York employers lost this credit a couple of years ago. Generally, if you pay your state unemployment tax on time, you get the credit.

SUTA is State Unemployment Tax Authority. It is essentially the state version of the federal unemployment tax. Each state has a wage base. Each new employer will be assigned a new employer rate that will adjust after 1 or 2 years of experience with employees. This is also a tax on wages paid by the employer. For instance, in Arizona, new employers pay 2% of wages up to $7000 or $140 per person per year. After some time has passed, the rate adjusts down if you have no unemployment claims or up if you do. Certain states have special starting rates depending on industry.