Accounting and Finance Foundations

Unit 8

Accounting and Finance Foundations Unit 8: Payroll 667

Payroll Student Guide

Chapter 20

Lesson 20.2 Employer’s SUTA and FUTA Taxes

In addition to Social Security and Medicare tax, employers are also responsible for federal and state unem-

ployment taxes. These two unemployment taxes do not affect employees’ paychecks. Instead, they are paid

entirely by the employer. Under the Federal Unemployment Tax Act (FUTA) most employers are required to

pay a federal unemployment tax. This tax, along with state unemployment tax (SUTA), provides for pay-

ment of unemployment compensation to workers who have lost their jobs.

The maximum earnings subject to FUTA tax, along with the tax rate itself, can be changed by Congress. The

current FUTA rate is 6.0% applied to the first $7,000 paid to each employee each year, but employers are

allowed a credit of up to 5.4% for participation in state unemployment programs.

Gross FUTA rate 6.0%

Credit for state unemployment taxes - 5.4%

Net FUTA rate 0.6%

Example

During the first quarter of this year, Melanie McFarren earned well over $7,000. If the state unemployment

(SUTA) tax is 5.4% applied the first $7,000 earned in a year, how much SUTA tax must Melanie’s employer

pay on her behalf? Also, how much FUTA must be paid?

SUTA = SUTA Tax Rate x Taxable Wages

SUTA = 5.4% x $7,000 = 0.054 x $7,000 = $378

FUTA = Net FUTA Tax Rate x Taxable Wages

FUTA = 0.6% x $7,000 = 0.006 x $7,000 = $42