Article
9 min read
FUTA vs SUTA Taxes: Employer Obligations, Risks, and Compliance
US payroll
PEO
Author
Jemima Owen-Jones
Last Update
November 28, 2025
Key takeaways
- Employers face confusion and risk around FUTA and SUTA compliance.Federal and state unemployment taxes come with different rules, rates, and reporting requirements. Misclassification of contractors and state-by-state variations increase the risk of costly mistakes.
- The solution is proactive compliance and accurate worker classification. Employers must stay on top of FUTA and SUTA rules, file correctly, and classify workers properly to avoid penalties, back taxes, and reputational damage.
- Deel provides a superior way to stay compliant. With US Payroll and PEO services, Deel automates FUTA and SUTA compliance, ensures correct classification, and manages state-by-state obligations — giving employers peace of mind and time back to focus on growth.
FUTA and SUTA are unemployment payroll taxes that US employers must pay for their employees. If you employ staff in the US, you’re responsible for calculating, reporting, and paying both correctly. Missteps can lead to penalties, audits, and back taxes.
These taxes exist to fund unemployment benefits at both the federal (FUTA) and state (SUTA) levels. While contractors are generally excluded, misclassification risks can unexpectedly make them part of the picture.
This guide explains FUTA and SUTA, how they differ, what your obligations are as an employer, how contractors fit into the conversation, and how Deel can help you stay compliant across every state.
FUTA explained
FUTA is a federal payroll tax that employers—not employees—pay to fund unemployment insurance.
- What it is: The Federal Unemployment Tax Act (FUTA) requires employers to pay tax on the first $7,000 of each employee’s annual wages. The base rate is 6%, but most employers qualify for credits that reduce the effective rate to 0.6%
- Who pays: Only employers pay FUTA; employees never contribute
- Where it goes: FUTA funds state unemployment programs and the federal government’s share of unemployment benefits
- Why it matters: Failing to pay FUTA exposes businesses to IRS penalties, interest, and possible audits
Pro tip: FUTA doesn’t exist in isolation. Employers also pay SUTA, and state contributions can reduce FUTA liability—so it’s important to consider them together.
SUTA explained
SUTA is a state payroll tax that employers pay, and it works alongside FUTA to fund unemployment insurance at the state level.
- What it is: The State Unemployment Tax Act (SUTA) requires employers to pay unemployment taxes based on employee wages. Rates vary by state and by employer history
- Who pays: In most states, only employers pay SUTA. However, a few states require employee contributions as well
- Where it goes: SUTA funds unemployment benefits for eligible workers in each state
- Why it matters: SUTA obligations differ across states, and new employers often face higher “default” rates until they establish a history
Pro tip: Each state sets its own SUTA wage base and rates, which can change annually. Always check your state’s Department of Labor website for updates.
See also: How Do State Payroll Taxes Vary in the US? (2025 Guide)
FUTA vs SUTA: how they work together
Employers must pay both FUTA and SUTA, but SUTA contributions can reduce federal FUTA liabilities.
- Employers who pay state unemployment taxes on time and in full can usually claim a credit of up to 5.4% against FUTA
- This means most employers pay an effective FUTA rate of just 0.6%
- States designated as “credit reduction states” may reduce the allowable FUTA credit, which increases federal tax liability
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We found everything we needed in Deel – hiring contractors, running US payroll, managing benefits and taxes, setting up new entities, and more, all in one place.
—Amir Prodensky,
Co-founder and CEO at Strada
Deel Payroll - US
Contractors and misclassification risks
Contractors aren’t subject to FUTA or SUTA—but if they’re misclassified, employers are liable for back taxes and penalties.
- Contractor exemption: Independent contractors don’t qualify for unemployment benefits, so employers don’t pay FUTA or SUTA on their wages
- Misclassification risk: If the IRS or a state agency determines a contractor is actually an employee, the employer owes back FUTA and SUTA taxes, plus penalties and interest
- Enforcement: The Department of Labor and state agencies regularly audit worker classifications
See also: The Definitive Employer Guide to Worker Classification
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Deel’s ability to manage payroll, HR, and compliance all in one place significantly simplified our internal processes. It’s not just faster—it's far more transparent for both HR and employees. This is especially helpful in places like California where the local labor laws can be exceptionally complex.
—Eunyoung (Clara) Lee,
US HR Manager, Liner
Deel Contractor of Record
Employer obligations by state
FUTA is the same across the US, but SUTA rules differ by state. That means your obligations can change depending on where your employees are.
Here’s how states vary:
- Wage base: Some states set their taxable wage base higher than the federal $7,000 standard
- Rates: New employers usually start with a flat rate that later adjusts based on payroll history (“experience rating”)
- Rules: States may require different reporting schedules or electronic filing
The result? Employers in high-base states like New York usually pay more in unemployment taxes than those in lower-base states like California or Texas.
FUTA vs SUTA comparison (2025)
| Jurisdiction | Wage base | New-employer rate | Established range | Notes |
|---|---|---|---|---|
| Federal (FUTA) | $7,000 | 6.0% (net 0.6% with credit) | — | Same nationwide; credit reductions can increase liability |
| California | $7,000 | 3.40% | 1.5% – 6.2% | Flat 3.4% for first 2–3 years |
| Texas | $9,000 | ~2.70% | 0.25% – 6.25% | Based on industry average until experience rating applies |
| New York | $12,800 | 4.10% | 2.1% – 9.9% | 2025 wage base raised to $12,800 |
Takeaway: FUTA is straightforward, but SUTA adds complexity. Employers operating in multiple states face very different tax obligations — making global people and compliance platforms like Deel essential.
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Payroll Director, FICO
Deel PEO
Simplify US payroll compliance with Deel
FUTA and SUTA are critical parts of the US unemployment system, and employers must navigate both federal and state requirements to stay compliant. Misclassification risks, varying SUTA rates, and credit reductions add complexity that can quickly create liability if handled incorrectly.
Deel helps US companies manage every aspect of payroll compliance, including FUTA and SUTA, through our US Payroll and PEO services. With Deel, you can ensure correct worker classification, stay compliant with federal, state, and local tax laws, and manage related requirements like COBRA administration and ACA compliance—all in one platform.
Book a 30-minute demo with an expert to see how Deel can simplify FUTA and SUTA compliance for your business.
FAQs
Do contractors pay FUTA tax?
No. Contractors don’t qualify for unemployment benefits, so employers don’t pay FUTA on contractor wages. Misclassification, however, changes this.
What is the difference between FUTA and SUTA taxes?
FUTA is a federal unemployment tax, while SUTA is a state-level tax. Both apply to employees, not contractors.
What are SUTA obligations for new employers?
Most states assign new employers a standard SUTA rate, which adjusts once they establish a payroll history.
What happens if workers are misclassified?
Employers may owe back FUTA and SUTA taxes, plus penalties, interest, and potential legal exposure.
How can employers stay compliant with FUTA and SUTA?
Using Deel ensures correct classification, accurate payroll tax calculations, and compliance with both federal and state obligations.
Jemima is a nomadic writer, journalist, and digital marketer with a decade of experience crafting compelling B2B content for a global audience. She is a strong advocate for equal opportunities and is dedicated to shaping the future of work. At Deel, she specializes in thought-leadership content covering global mobility, cross-border compliance, and workplace culture topics.
