The video also threatens the life of British captive, David Haines.
Sotloff speaks to the camera before he is killed, saying he is "paying the price" for U.S. intervention.
The masked ISIS figure in the video speaks to U.S. President Barack Obama, telling him, "Just as your missiles continue to strike our people, our knife will continue to strike the necks of your people."
Last week, Sotloff's mother Shirley Sotloff released a video pleading with ISIS leader Abu Bakr al-Baghdadi not to kill her son.
"Steven is a journalist who traveled to the Middle East to cover the suffering of Muslims at the hands of tyrants. Steven is a loyal and generous son, brother and grandson," she said. "He is an honorable man and has always tried to help the weak."
Sotloff appeared last month in an ISIS video showing the decapitation of another American journalist, James Foley. The militant in the video warned that Sotloff's fate depended on what President Barack Obama did next in Iraq.
Steven Sotloff disappeared while reporting from Syria in August 2013, but his family kept the news secret, fearing harm to him if they went public.
Out of public view, the family and a number of government agencies have been trying to gain Sotloff's release for the past year.
Sotloff, 31, grew up in South Florida with his mother, father and younger sister. He majored in journalism at the University of Central Florida. His personal Facebook page lists musicians like the Dave Matthews Band, Phish, Miles Davis and movies like "Lawrence of Arabia" and "The Big Lebowski" as favorites. On his Twitter page, he playfully identifies himself as a "stand-up philosopher from Miami."
In 2004, Sotloff left UCF and moved back to the Miami area.
He graduated from another college, began taking Arabic classes and subsequently picked up freelance writing work for a number of publications, including Time, Foreign Policy, World Affairs and the Christian Science Monitor. His travels took him to Yemen, Saudi Arabia, Qatar and Turkey -- among other countries -- and eventually Syria.