FUTA and SUTA Unemployment Tax: The 2026 Employer Guide

How FUTA and SUTA work together

FUTA and SUTA are two separate unemployment taxes that fund the same benefit system from two directions. FUTA, the federal unemployment tax, is reported once a year on Form 940, and it is an employer-only tax, it is never withheld from an employee's paycheck the way federal income tax or FICA is. SUTA, the state unemployment tax, is a separate obligation set by each state where an employer has payroll. Most employers end up paying both on the same wages, FUTA to the IRS and SUTA to the state, because the FUTA rate structure is built around the assumption that a matching state tax is also being paid on time.

That relationship between the two taxes is not incidental. As the sections below cover, the federal rate collapses to a much smaller number specifically because the state tax exists and gets paid, and it climbs right back up in the states, and for the employers, where that assumption breaks down.

The trigger, the rate, and the deposit deadlines

Liability for FUTA starts under what the IRS general test calls two independent conditions. An employer owes FUTA once it pays wages of $1,500 or more in any single calendar quarter, or once it has one or more employees working for some part of a day in 20 or more different weeks in the current or prior year. Either condition by itself is enough, an employer does not need to meet both.

Once an employer is liable, the FUTA rate is 6.0% on the first $7,000 of wages paid to each employee in the year, no more than that per employee regardless of how much they actually earn. A credit of up to 5.4% is available for state unemployment tax paid on time on those same wages, which brings the net FUTA rate down to 0.6%, or up to $42 per employee per year, in a state that is not carrying a credit reduction that year.

Deposit timing follows its own rule, separate from the annual return. FUTA has to be deposited by electronic funds transfer by the last day of the month after the end of any calendar quarter in which cumulative FUTA liability for the year exceeds $500. If the running total is $500 or less at the end of a quarter, no deposit is due yet, the balance simply carries forward into the next quarter. Form 940 itself is due January 31 each year, or February 10 if every required deposit was made on time during the year.

The penalty: credit reduction states and a smaller credit

The financial exposure in FUTA compliance runs through the credit, not a separate fine. For the 2025 Form 940, filed in January 2026, two jurisdictions carry a FUTA credit reduction: California at 1.2% and the U.S. Virgin Islands at 4.5%. Employers with wages in either jurisdiction owe additional FUTA tax on top of the standard net rate, and that extra amount is treated as incurred in the fourth quarter of the year rather than spread across all four quarters.

That reduction, and the fourth quarter wages it applies to, is reported on Schedule A (Form 940). Schedule A is not optional paperwork reserved for employers in a credit reduction state. Any employer that paid state unemployment tax in more than one state during the year has to file it, even where none of those states carries a reduction for that year, because Schedule A is also where FUTA taxable wages get allocated across states.

What a 25 to 100 employee employer gets wrong

The most common mistake at this size of employer is assuming the full 5.4% FUTA credit is automatic once SUTA is being paid at all. It is not. The full credit is only available if the state unemployment tax was paid in full, on the same wages, by the Form 940 due date. An employer that runs a little behind on a SUTA deposit, for cash flow reasons or simply because the state filing calendar slipped, loses part of that credit and ends up owing more FUTA than expected on top of whatever late penalty the state itself charges for the SUTA payment. A 25 to 100 employee employer running payroll across two or three states is also the size most likely to miss that Schedule A is required in every one of those states, not just the one carrying a credit reduction that year, since a smaller company is less likely to have a dedicated tax team cross-checking IRS filing requirements against state unemployment registrations.

BEG registers the client for state unemployment accounts in every state where it has employees, applies the state SUTA rate notice inside the payroll system as soon as the state issues it, and makes the quarterly FUTA deposits on the IRS schedule. BEG also files the state SUI returns and the annual Form 940, including Schedule A for clients with wages in more than one state. What stays with the client and its CPA is anything that is a rate decision rather than a filing task: disputing a state unemployment experience rate, filing a benefit-charge protest, or deciding whether to make a voluntary contribution to lower a future rate. Those calls carry financial and strategic tradeoffs specific to the business, so BEG applies whatever rate the state issues once it is final rather than making that call itself.

Full BEG managed payroll handles the deposit and filing side of FUTA and SUTA as a standard part of the service, not as a separate compliance product billed on top.

What this means for payroll operations

• Track both liability tests, not just wages. The 20-different-weeks test can trigger FUTA liability even in a quarter where wages never reach $1,500.
• Pay SUTA on time, every quarter, on every wage it covers. The 5.4% credit is conditional, not automatic, and a late SUTA payment raises the net FUTA bill on the same wages.
• Check the credit reduction list before filing. California and the U.S. Virgin Islands both carry a reduction for the 2025 Form 940, and that extra tax lands entirely in the fourth quarter.
• File Schedule A for every multi-state employer. It is required whenever SUTA was paid in more than one state, regardless of whether any of those states carries a reduction.
• Watch the $500 deposit threshold by quarter. A balance under $500 carries forward, so a quarter that looks like it owes nothing can still be building toward a deposit due the following month.
• Keep experience rate decisions with counsel or the CPA. Protesting a benefit charge or making a voluntary contribution is a rate strategy decision, separate from the deposit and filing work a payroll provider handles.

Frequently Asked Questions

Sources: IRS, About Form 940; IRS Tax Topic 759, Form 940; IRS, Schedule A (Form 940); IRS, FUTA Credit Reduction. This is general tax information, not tax or legal advice.