State Unemployment Tax Act (SUTA) Explained
Employers have many factors to consider when it comes to taxes – not only do they have to maintain compliance with their personal tax information, but they are also responsible for withholding payroll taxes from their employee’s wages, and one of these tax types is SUTA taxes.
TABLE OF CONTENTS
What Is SUTA?
Who Has To Pay SUTA Tax?
SUTA Tax Exemptions
How Do SUTA Taxes Work?
SUTA Tax Wage Base
SUTA Tax Rates
How To Find Your SUTA Tax Rate
How To Lower Your SUTA Tax Rate
How To File SUTA Taxes
When Are SUTA Taxes Due?
Frequently Asked Questions
How do SUTA taxes work for employers with employees in multiple states?
Are SUTA taxes refundable?
How do I know if my company is exempt from SUTA taxes?
Are SUTA taxes and FUTA taxes the same?
Key Takeaways:
- The State Unemployment Tax Act (SUTA) is an employer payroll tax used to fund state unemployment programs.
- The SUTA wage base limit, or the maximum amount of an employee’s earnings that are subject to SUTA taxes, is enforced at the state level, ranging from $7,000 to $67,600 across the U.S. states.
- The SUTA tax rates are assigned at the state level, but rather than each state having a set percentage, each state assigns a tax rate range, so employers within the same state may be paying different SUTA tax liabilities.
What Is SUTA?
The State Unemployment Tax Act (SUTA) is a payroll tax that employers are required to pay to fund state unemployment programs. The SUTA tax funds that are collected are used for unemployment benefits in the case that people are let go from their jobs.
SUTA taxes are sometimes referred to using another article, such as state unemployment insurance (SUI), employment security tax, or reemployment tax, but all of these names refer to the same payroll tax.
Who Has To Pay SUTA Tax?
Almost all of the states in the U.S. only require employers to make SUTA contributions, but there are a few exceptions. In states like Alaska, New Jersey, and Pennsylvania, employees are also required to pay SUTA tax.
SUTA Tax Exemptions
Because the SUTA tax is largely defined on a state-by-state basis, some states choose to exempt certain organizations from the SUTA tax responsibility, such as certain charitable or religious organizations. Some states also exclude specific types of services or employment types from the SUTA tax, which is also referred to as exempt employment.
Employers who are wondering if their small business meets any SUTA tax exemptions should always check their state’s website to learn about their state laws.
How Do SUTA Taxes Work?
SUTA taxes are calculated using a basic formula, depending on the value of both the wage base and the tax rate for the state.
wage base x tax rate
This can get more complicated, however, because while wage bases are uniform within a state, the SUTA tax rate is not the same for employers across the state level.
SUTA Tax Wage Base
Each state has the ability to set its own taxable wage base or wage limit for SUTA taxes, which means the maximum portion of an employee’s income that is subject to SUTA taxes. Once a state has appointed its SUTA tax wage base, this threshold is uniform across all employers in the state who are not exempt from SUTA tax withholding.
The wage base limit for SUTA taxes varies significantly from state to state. Some states only tax the first $7,000 of workers’ earnings, while other states apply the tax to up to $67,6000 of employees’ earnings.
Here is an example of SUTA wage limits. The limit for SUTA wages in Arkansas, California, Florida, and Tennessee is $7,000. So, if a company in one of these states had one employee who earned $10,000 per year, the maximum portion of their earnings that will be taxed for state unemployment tax is the first $7,000.
The wage base for SUTA taxes is subject to change every year, so it is important that employers stay up to date on how much they are required to withhold from their employee’s paychecks.
SUTA Tax Rates
The state unemployment tax rates vary from state to state in the same way that SUTA wage bases do. While SUTA wage limits describe an income threshold limit, SUTA tax rates are usually defined as a range of rates, such as the 1.5% to 6.2% tax rate range in the state of California.
While the SUTA tax rate can vary within a state, all employers within the same state will use the same wage base when calculating their SUTA tax liability.
Employer Experience
States will consider the age of businesses when determining state unemployment insurance tax rates. Due to the fact that newer employers will not have a sufficient employment history for the state to evaluate, newer employers are usually taxed at a higher SUTA tax rate.
Individuals who are new to being employers are often given a standard new employer SUI rate by the state, and as they gain experience as an employer, the state will provide them with a new SUTA rate.
Employment History
States often consider the history of employment, unemployment, and turnover within a business when assigning SUTA tax rates. The history of how many unemployment claims have been filed by former employees or the turnover history of a business is known as the employer’s experience rating, and the higher the turnover rate, the more likely the employer will be assigned a higher taxation amount.
Industry
States might decide to issue SUTA tax rates dependent on the industry. Typically, industries like the construction industry that have high employee turnover rates will consequently have higher SUTA rates than non-construction industries.
How To Find Your SUTA Tax Rate
New employers can find out their SUTA tax rate by following these instructions:
1. Register for a SUTA tax account with the state you live in by visiting the official website for your state.
2. Obtain your state’s new employer contribution rate.
3. Obtain the updated SUTA tax rate from your state.
How To Lower Your SUTA Tax Rate
While there is nothing companies can do to lower the wage base limit for their state, there are some things that are in their control that can help them reduce their SUTA tax rate. Here are some SUTA tax tips:
Hire Carefully
While it may seem obvious for employers to be selective when interviewing candidates for job openings, if the goal is to promote employee retention and avoid layoffs so that they can earn a lower SUTA tax rate, it is important to carefully assess the skills and personalities of potential new employees to hopefully only hire workers who will continue working for the organization for a while. It is beneficial to think long-term about the company’s goals to do this hiring assessment more effectively.
Reduce Turnover Rate
From the perspective of the state, high employee turnover rates indicate that the employer is especially likely to have employees quit or be laid off, which would then increase the number of unemployment claims being filed.
In order to avoid having a high turnover rate and consequently being assigned a high SUTA tax rate, it is beneficial to cultivate a positive work environment for employees to promote workplace satisfaction.
By focusing on employee satisfaction in a proactive manner before a problem arises, employers are more likely to achieve employee retention and set themselves up for success in receiving a lower SUTA tax rate.
Avoid Firing Employees
When workers are laid off and file for unemployment claims, this action indicates to states that the employer has a track record of employee turnover and should therefore pay higher SUTA contributions.
If an employer is considering letting an employee go, whether it is for budget or situational reasons, it is beneficial to search for alternative options before moving forward and ending up getting assigned high SUTA tax rates.
How To File SUTA Taxes
In the same way that each state defines the wage base and tax rates for SUTA taxes, they also have different filing requirements. Many states require employers to file an annual IRS Form 940, but in case there is a difference in your particular state, the most reliable method of accessing the tax forms required to report SUTA taxes will be to refer to your state’s website. There, you will be able to confirm your state’s SUTA wage base, SUTA tax rate, the tax forms necessary to report SUTA taxes, and the payment frequency requirements.
Employers will need to register their status as an employer with their state and in every state where they have employees based. In order to set up an account, employers will already need to register for a federal EIN number with the IRS. They can make their employer account with the state by referring to the state’s official website. After successfully setting up an account, they will be issued an employer identification number (EIN), which will be used when filing taxes, as well as their new employer contribution rate.
When Are SUTA Taxes Due?
The filing and payment requirements for SUTA taxes vary from state to state, but most areas require individuals to file a yearly tax return but submit quarterly tax payments. Here are the quarterly tax payment deadlines:
- Quarter 1 (January, February, March): April 30
- Quarter 2 (April, May, June): July 31
- Quarter 3 (July, August, September): October 31
- Quarter 4 (October, November, December): January 31
In situations where the filing deadline falls on a weekend or national holiday, the deadline is extended to the following business day.
Frequently Asked Questions
How do SUTA taxes work for employers with employees in multiple states?
Taxpayers who own a business with employees in multiple states, also known as multi-state employers, are required to file SUTA taxes in every state where their employees reside. This can make employer taxes significantly more complicated, as they will need to consider the wage base and tax rates for every state. For this reason, it is beneficial for multi-state employers to seek the help of a CPA or another tax professional when preparing their taxes to ensure they are compliant with all state and federal tax laws.
Are SUTA taxes refundable?
SUTA taxes are a type of refundable tax, so if employers overpay their SUTA tax liability, they will have the option to either have this overpayment credited toward future tax returns or receive their overpayment as a refund check.
How do I know if my company is exempt from SUTA taxes?
Certain organizations are exempt from SUTA taxes, such as charitable, religious, and educational institutions, and government employers. The best method of finding out if your company is exempt from SUTA taxes is to visit your state’s website for their specific SUTA tax exemption rules.
Are SUTA taxes and FUTA taxes the same?
While FUTA taxes fund federal unemployment programs and utilize tax rates that are uniform across the United States, SUTA taxes fund unemployment programs at the state level, and are defined at a state-by-state level. Employers who do business in a state that requires SUTA tax payments will have to pay both FUTA and SUTA taxes.
Understanding your taxpayer responsibilities is an essential part of being a business owner and employer, and this includes paying SUTA taxes.
While it may seem daunting to keep track of all of your payroll tax responsibilities, taxpayer deadlines, and tax filing, if you have any confusion about these tax topics, the guidance of an experienced tax professional is just one free consultation away.
Set up a meeting with a tax consultant at Ideal Tax to take control of your tax situation today.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
