Payroll Part 3: What is FUTA and SUTA?
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This is part 3 of a 5 part payroll series.
Part 1: Contractors vs. Employees
Parts 4-5 coming soon!
We’re going to continue talking about payroll taxes today and answering the question, what is FUTA and SUTA?
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If you’ve never ran payroll for an employee before, you might never have heard of this type of payroll tax because it’s paid by the employer only.
FUTA stands for Federal Unemployment Tax Act and SUTA stands for State Unemployment Tax Act.
Some states might call SUTA another name such as Employment Security Tax, Reemployment Tax, or State Unemployment Insurance (SUI).
How much is FUTA and SUTA tax?
FUTA is only paid on the first $7,000 you pay to every employee and is 6% of their gross pay.
Because each state has its own set of rules, you’ll need to check for your specific state’s rate (usually between 2-5%) and wage base (limit on how much of the employee’s income will be taxed). Many times the state will do regular reviews of your payroll and update your SUTA rate either yearly or throughout the year. This is important because you’ll need to update this rate in your payroll software!
Also, some wages are exempt from FUTA and some states’ SUTA. For FUTA, exemptions include wages paid to a spouse, child under 21 years old, or their parents. Other exemptions include employer contributions to an employee’s retirement account, group term life insurance, and some fringe benefits. Having a good payroll software like Gusto will help set this all up correctly.
Do I have to pay FUTA on wages paid to a household employee?
Many successful coaches and online business owners hire help for their homes such as a nanny, house cleaner, chef, etc.
We will do a separate article on this to go into more detail on when these types of people are considered a household employee that must be paid payroll.
You must pay FUTA on a household employee’s wages if both of these apply:
Cash wages of $1,000 or more were paid in one quarter of the year.
They performed services in a private home, local college club, or local chapter of a college fraternity or sorority.
Where does FUTA and SUTA money go?
This tax goes to states to pay Unemployment payments to those who are out of work.
Is there anything else I need to know?
If you pay SUTA in full and on time, you can take up to a 5.4% FUTA tax credit. This lowers your FUTA liability which is kind of cool!
So there it is, the down and dirty on FUTA and SUTA. Luckily, payroll software like Gusto helps automate a lot of this payroll tax and having a bookkeeper (like us 😉) running your payroll means you never have to deal with this stuff, only send in images of notices you receive from the government. Cool, right?
