Question

What are FUTA and SUTA taxes? Is there any possible reduction in the FUTA tax rate? If so, what is the reduction, and how is this determined?

a) FUTA: Federal Unemployment Tax Act; SUTA: State Unemployment Tax Act; Reduction based on employee turnover
b) FUTA: Federal Unemployment Tax Act; SUTA: State Unemployment Tax Act; Reduction based on timely payments
c) FUTA: Federal Unemployment Tax Act; SUTA: State Unemployment Tax Act; No reduction available
d) FUTA: Federal Unemployment Tax Act; SUTA: State Unemployment Tax Act; Reduction based on state employment rate

Answer 1

FUTA and SUTA are federal and state-level taxes used to fund unemployment benefits. Employers can receive a credit reduction for the FUTA tax rate based on state unemployment taxes paid, not on employee turnover or state employment rates.

Step-by-step explanation:

The FUTA tax, or the Federal Unemployment Tax Act, is a federal employer tax used to help fund state workforce agencies. Employers pay FUTA tax on the first $7,000 in wages paid to each employee. SUTA tax, or State Unemployment Tax Act, is a state employer tax that funds the state's unemployment benefits. States can set their own tax base above the $7,000 federal wage base.

Employers can often receive a credit reduction for the FUTA tax rate based on compensation for state unemployment taxes paid. This reduction is not based on employee turnover, state employment rates, or timely payments specifically—it's a general tax credit employers receive for state unemployment taxes paid. If the state has paid its loans for unemployment funds back to the federal government on time, employers in that state can receive a credit of up to 5.4% against their FUTA tax liability, reducing the effective FUTA tax rate.