The federal FUTA tax rate is 6% on the first $7,000 paid to each employee. That’s the full FUTA tax rate for all years. In some cases, the IRS permits employers to reduce their federal FUTA tax rate based on paying SUTA. This is called the credit for state unemployment tax.
The credit for state unemployment tax works like this: the full federal FUTA tax rate of 6% is reduced by 5.4% percentage points, bringing your federal FUTA tax rate down to 0.6%.
Employers qualify for the credit for state unemployment tax as long as:
· Pay SUTA taxes on time: You must pay the SUTA tax by your state’s deadlines
· Pay SUTA taxes before FUTA taxes: You must pay your SUTA tax before your FUTA taxes are due
· Credit reduction states: Employers in certain states are not eligible for the 5.4% reduction; see the Credit Reduction States section below
Sometimes, a state borrows money federal government to pay for unemployment benefits. When a state has not yet repaid its loan to the federal government, employers are not eligible for the full 5.4% credit. Only a reduced credit is available. Such states are called credit reduction states.
Employers who have employees in a credit reduction state fill out Form 940 Schedule A in addition to their Form 940.
For the year 2018, there is just one credit reduction state: the United States Virgin Islands. Employers in the Virgin Islands pay a net federal FUTA tax rate of 3% for the year 2018. This 3% rate is composed of the 0.6% standard FUTA rate plus a 2.4% credit reduction rate.
FUTA tax rates in credit reduction states for other years include:
· Year 2019: Credit reduction states have not yet been announced
· Year 2017: Employers in California & the Virgin Islands were subject to a credit reduction; what this means for you is that if you paid wages in the state of California or the U.S. Virgin Islands, your net federal FUTA tax was 2.1%, compared to 0.6% for the rest of the U.S.
|
State |
2018 FUTA Rate |
Maximum FUTA Tax per Employee |
|
Virgin Islands |
3.0% |
$210 |
|
Rest of the U.S. |
0.6% |
$42 |
SUTA refers to taxes or contributions paid into a state-level unemployment fund. These funds are held by the state to pay out unemployment benefits. Each state sets its own unemployment tax rates, so the SUTA tax rates vary from state to state.
|
State |
SUTA Tax Rates for Existing Business |
SUTA Tax Rates for a New Business |
|
California |
1.5% to 6.2% |
3.4% |
|
Massachusetts |
0.56% to 18.55% |
10.5% to 11% for nonconstruction industry |
|
New York |
0.9% to 8.3% |
3.6% |
|
Texas |
0.36% to 6.36% |
2.7% |
States use a variety of complicated formulas to calculate each employer’s unemployment rate. SUTA tax varies not only by state but also by business within the state
For example, a common component in these formulas is the number of employees that are laid off or fired from your business who collect unemployment compensation. States often reward businesses with stable employment by assessing lower SUTA taxes on them, so the best way to reduce your SUTA taxes is to keep turnover to a minimum.
If you have an employee who is not performing well, try to find out what the issue is and see if it is something that you can help with before you fire them. Maybe there is an easy fix to the problem or perhaps they need some additional training.