In every state, employers pay SUTA tax out of their own funds as a cost of doing business, and it is not withheld from worker paychecks at the federal level. The only exceptions are Alaska, New Jersey, and Pennsylvania, where employees also contribute a small percentage of their wages through payroll withholding on top of what the employer pays. So the short answer to who pays SUTA tax is: the employer always, and the employee only in those three states.
Why the Employer Bears the Cost
State unemployment tax funds benefits for workers who lose their jobs through no fault of their own, and the system is built on the premise that the employer funds it. The federal counterpart, FUTA, imposes a 6.0 percent tax on the first $7,000 of each employee’s annual wages.1Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax2Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax3Employment & Training Administration – U.S. Department of Labor. Unemployment Insurance Tax Topic
Fall behind on state payments and the IRS can reduce that credit, pushing your federal bill up to as much as $420 per employee. Either way, the money comes from the business. It is never a line item deducted from wages the way Social Security or federal income tax is.
Your actual state bill depends on the taxable wage base your state applies to each employee’s annual earnings and the tax rate assigned to your account. For 2026, wage bases range from $7,000 in some states to $78,200 in Washington. New employers pay a standard entry-level rate until the state has enough claims history (usually two to three years) to assign an experience-based rate, which rises with layoffs and falls with workforce stability. Top rates in some states exceed 10 percent, and Massachusetts has a maximum above 12 percent.
The Three States Where Employees Also Pay
Alaska, New Jersey, and Pennsylvania are the outliers. In each, the employer withholds a small employee share from every paycheck and remits it to the state along with the employer’s own contribution.
- Alaska: employees contribute 0.50 percent of wages up to the state’s 2026 taxable wage base of $54,200, capping the annual employee share at $271.
- Pennsylvania: the employee contribution rate for 2026 is 0.07 percent of wages, amounting to a few dollars per pay period for most workers.
- New Jersey: employees pay into the state unemployment fund through payroll withholding, alongside separate withholdings for state disability insurance and workforce development.
The employer is responsible for calculating, withholding, and remitting these amounts. If your business is based elsewhere but you have workers in any of these three states, your payroll system has to be set up to handle the withholding for those employees specifically.
When a Business Actually Owes SUTA
Not every business owes unemployment tax from day one. Federal law treats you as a covered employer once you meet either of two tests during the current or preceding calendar year:4Office of the Law Revision Counsel. 26 USC 3306 – Definitions
- Wage test: you paid $1,500 or more in total wages in any single calendar quarter.
- 20-week test: you employed at least one person for any part of a day in 20 different calendar weeks. The weeks do not have to be consecutive.
Crossing either threshold triggers an obligation to register with your state’s unemployment tax agency and start filing quarterly returns.5Office of Unemployment Insurance (OUI). Tax Fact Sheet Most states follow these federal benchmarks, and some set lower ones, so check your specific state’s rules. Once you are in, coverage usually continues for the rest of that calendar year and all of the following year even if your workforce drops back below the threshold. Seasonal employers hit the 20-week test quickly because a single part-time worker on any day of a week counts that week.
Workers and Employers Who Are Exempt
Some workers and organizations are outside the SUTA system entirely, meaning nobody pays the tax on their wages. Knowing where the lines are prevents overpaying and, in the case of worker classification, prevents costly mistakes in the other direction.
501(c)(3) Nonprofits
Organizations recognized under Section 501(c)(3) of the Internal Revenue Code are exempt from FUTA, and the exemption cannot be waived.6Internal Revenue Service. Exempt Organizations – What Are Employment Taxes Most states also exempt 501(c)(3) employers from paying standard quarterly SUTA contributions but let them elect to become “reimbursable” employers instead. Under that arrangement, the nonprofit reimburses the state fund dollar-for-dollar for benefits actually paid to former employees rather than paying a rate-based quarterly tax. It saves money for nonprofits with low turnover and costs more for those with frequent layoffs.
Children Working for a Parent
A child under age 21 working for a parent’s sole proprietorship, or for a partnership in which each partner is the child’s parent, is not subject to FUTA.7Internal Revenue Service. Family Employees – Section: Children Employed by Parents The exemption ends when the child turns 21 or if the business is a corporation.
Independent Contractors
Workers correctly classified as independent contractors are not employees, so no SUTA is owed on their pay. In a majority of states the key test for SUTA purposes is the ABC test: the worker is treated as an employee unless all three of these are true—the worker is free from the hiring entity’s control over how the work is done, the work falls outside the company’s usual business, and the worker has an independently established trade or business. Misclassifying an employee as a contractor can produce back taxes, interest, and penalties, so this is the most consequential SUTA judgment most small employers ever make.
Domestic and Agricultural Work
Small-scale domestic and agricultural work may be exempt below certain wage thresholds that each state sets. Some states exempt farm labor entirely below a set quarterly payroll figure; others apply the standard thresholds. The specifics vary by state.
Which State You Pay for a Multi-State Worker
When one employee works in more than one state, you pay SUTA to only one state for that worker, not to every state where they perform any work. A four-part localization test decides which state gets the tax, applied in order until one of them resolves the question:8Department of Labor (DOL). Unemployment Insurance Program Letter No. 20-04 Attachment I – Localization of Work Provisions
- Localization: is the work localized in one state, with only minor or incidental work elsewhere? If yes, that state.
- Base of operations: if the work is not localized, does the worker perform any service in the state where their base of operations sits?
- Direction and control: if not, does the worker perform any service in the state from which the work is directed and controlled?
- Residence: if none of the above resolves it, does the worker perform any service in the state where they live?
Remote workers whose home state differs from company headquarters are the most common reason to run this test. Paying the wrong state does not satisfy the correct state’s claim, so working through the four steps up front is worth the time.