If you use a PEO, your unemployment taxes are one of the things it takes off your desk. Two taxes fund the unemployment system: FUTA at the federal level and SUTA at the state level. A PEO calculates, files, and pays both. But your business is still the employer the system is built around, and one piece of it, your state experience rating, can follow you in ways worth understanding before you sign. This guide explains how FUTA and SUTA each work, what a PEO does with them, and the state-by-state wrinkle that trips up owners.

Top-down flowchart. Your business pays wages to a PEO, which runs payroll and files both unemployment taxes. FUTA, the federal share, is paid to the IRS on Form 940. SUTA, the state share, is reported under the PEO's or your own state account, where your experience rating sets the rate and drives your SUTA cost. Throughout, your business remains the employer of record.
How FUTA and SUTA route from your business through a PEO, and why your SUTA rate stays tied to you.

The Two Unemployment Taxes, in Plain Terms

Unemployment benefits are funded by employer taxes, and there are two of them. FUTA, the Federal Unemployment Tax Act, is the federal share. SUTA, the State Unemployment Tax Act, is the state share, and it is the one that actually pays most benefits. In almost every state employees pay neither tax; this is an employer cost (source: IRS, Topic No. 759). The table below sets the two side by side.

FUTA vs SUTA at a glance
FeatureFUTA (federal)SUTA (state)
What it fundsAdministration of the unemployment system and a federal backstopMost unemployment benefits paid to workers
Rate6.0% gross, but a 5.4% credit for paying state tax on time brings it to 0.6% for most employersSet by each state, and varies with your industry and your layoff history
Wage baseFirst $7,000 of each employee's wages, unchanged since 1983Set by each state, and usually higher than $7,000
Typical costAbout $42 per employee per year at the 0.6% net rateVaries widely by state and by employer
Who paysEmployer onlyEmployer only in almost every state
Return and filingIRS Form 940, filed once a yearA state return, usually filed quarterly

Rates and wage bases current for 2026. A simplified view; your state's rules and your own experience rating decide the exact SUTA number. Confirm specifics with the provider and your own advisor.

How FUTA Works

FUTA is the simpler of the two. The tax is 6.0% on the first $7,000 you pay each employee in a year, but employers who pay their state unemployment tax on time earn a credit of up to 5.4%, which drops the effective federal rate to 0.6% (source: IRS, Topic No. 759). At that net rate, FUTA costs about $42 per employee per year, and it is reported once a year on IRS Form 940 (source: IRS, About Form 940).

One exception raises the bill. When a state borrows from the federal government to pay benefits and does not repay the loan in time, employers in that state lose part of the 5.4% credit, so their effective FUTA rate climbs. The IRS publishes the list of these credit reduction states each year (source: IRS, FUTA Credit Reduction). A PEO tracks that list for you and applies the right rate at filing time.

How SUTA Works

SUTA is where the complexity lives, because every state runs its own program. Each state sets its own tax rate and its own taxable wage base, and that wage base is usually higher than the federal $7,000 (source: U.S. Department of Labor, State Unemployment Insurance Tax). Your SUTA rate is also experience rated: a business with few unemployment claims pays a lower rate, and a business with a history of layoffs pays more (source: U.S. Department of Labor, State Unemployment Insurance Laws). New employers start at a standard state rate until they build enough history to be rated on their own record.

Two features make the state share the variable one. First, each state sets its own taxable wage base, and it is usually well above the federal $7,000 floor, in some states several times higher, so more of each paycheck is taxed (source: U.S. Department of Labor). Second, the rate is experience rated and reset periodically: file few claims and it drifts down, absorb a round of layoffs and it climbs. A new employer has no record yet, so the state assigns a standard new-employer rate, often in the low single digits of a percent, until enough quarters accumulate to rate the business on its own history (source: U.S. Department of Labor). FUTA has neither feature, one wage base and one rate nationwide, which is why the federal share stays nearly fixed while the state share is the one worth watching.

Because SUTA is tied to where work is performed, not where your company is headquartered, an employee working in another state is taxed under that state's system. For a business with people in several states, that means several state accounts, several wage bases, and several returns. This is the administrative weight a PEO is built to carry, and it is a large part of why multi-state employers lean on one.

What a PEO Does With Your Unemployment Taxes

A PEO folds unemployment tax into the payroll and tax service it already runs for you. In practice, a PEO typically:

  • Calculates FUTA and SUTA on every payroll, applying the correct wage base and rate for each employee's work state.
  • Files IRS Form 940 for FUTA and the required state returns for SUTA, and remits the payments on time so you keep the full FUTA credit.
  • Tracks credit reduction states and annual rate changes so your filings stay current without you watching for them.
  • Manages unemployment claims when a former employee files, and responds to the state on the account, which helps protect the experience rating.
  • Handles the state-by-state registration and reporting that multi-state payroll requires.

For deeper detail on the full filing stack, see our guide to PEO tax filing and compliance.

The State Wrinkle: Whose Account Reports the Tax

Here is the detail that surprises owners. States do not all treat PEO unemployment reporting the same way, and there are broadly three approaches. In some states, the PEO reports SUTA under its own state account. In others, the PEO reports under your account but does the work. And a few states do not recognize PEO reporting for unemployment at all, so you keep a direct state account even while the PEO handles everything else (source: U.S. Department of Labor, State Unemployment Insurance Tax).

Under the first model, the PEO files your SUTA under your own state account and your own experience rate. The provider does the calculating, filing, and paying, but the rating driving the bill is the one your business earned. This is the cleanest arrangement for continuity: your history stays attached to you, and leaving the PEO does not reset it.

Under the second model, the PEO reports SUTA under its own state account, so the rate applied to your workers is the PEO's experience rate rather than yours. That can cut either way. A PEO with a low, stable rate may tax your payroll at less than your own standalone rate would; a PEO carrying a higher rate can cost you more, even when your own claims history is clean. And because the experience accrues to the PEO's account, leaving can mean you do not carry it back, so you may restart at your state's new-employer rate and rebuild from there. This is the detail owners most often miss.

Which of the three models applies depends entirely on your state, and on where each of your employees actually works, so a multi-state employer can sit under more than one at the same time.

What to Check Before You Sign

The unemployment piece is easy to pin down in a first conversation. Before you sign, ask the provider to walk through a few specifics:

  • Whose account your SUTA is reported under in each state where you have employees, yours or the PEO's.
  • What SUTA rate would apply to your workers under the PEO, and how it compares with your current standalone rate.
  • What happens to your experience rating if you leave: do you resume your own rate, or restart at the state's new-employer rate?
  • How the provider responds to unemployment claims, since defending valid claims is what protects the rating over time.
  • Whether it tracks FUTA credit reduction states and handles the state registrations your payroll footprint requires.
  • Whether the provider is a certified PEO (CPEO), which carries an added layer of federal tax accountability.

The Bottom Line

Unemployment tax is two taxes, one federal and one state, and a PEO can carry both. FUTA is small and largely fixed, about $42 per employee a year for most businesses once the state credit applies. SUTA is the variable one, set by your state and driven by your own experience rating, and it is where a PEO's multi-state machinery earns its fee. What a PEO cannot do is change the fact that your business is the employer behind the account, or that your layoff history follows you. Use the PEO for the filings and the claims work, ask how it reports SUTA in your state, and keep an eye on the rating that is ultimately yours.

Before you talk to anyone, you can estimate your PEO costs to get a rough sense of the total.

When you are ready, you can request a free consultation. Our independent broker will connect you with PEOs that handle unemployment tax across the states where you operate, at no cost to you. The consultation is free to you. If you sign through the broker, he shares part of his fee with us. The process takes several business days.

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