If you’re a small business owner with employees, you’ll need to understand the State Unemployment Tax Acts (SUTA). Once you hire employees, you have to pay more than your own Social Security and Medicare taxes. In addition, you’re required to pay SUTA taxes to your state. Learn what SUTA tax is, who pays it, how to calculate it, and whether or not you’re required to pay it in this article from Nav’s experts.
What Is SUTA Tax?
SUTA is a form of payroll tax that all states require employers to pay for each of their employees. It’s also known as state unemployment insurance (SUI) or unemployment insurance tax (UI tax). SUTA is a counterpart to FUTA, the federal unemployment insurance program, which we discuss below. The money collected through SUTA goes to the state’s unemployment fund to offer state unemployment insurance. This insures employees who lost their jobs for reasons that were not their fault.
In most cases, employees do not pay into this fund, as SUTA tax is usually an employer-paid tax. But how much you’ll have to pay in SUTA tax as a small business owner depends on the state you do business in and the employer rate your state assigns to your organization.
Fortunately, there are some steps you can take to keep your SUTA rate low. First and foremost, avoid layoffs and employee turnover as much as possible. Here’s why: The fewer employees that opt for unemployment benefits, the less your rate will be. You should also file unemployment appeals in a timely fashion. If you have a high turnover rate or handle employee terminations improperly, you can expect an increase in your rate.
Who Pays SUTA Taxes?
Some states like Alaska, New Jersey, and Pennsylvania require both the employer and the employee to pay SUTA taxes. Typically, however, only the employer is on the hook for them. If you’re a small business owner with employees, rather than 1099 independent contractors, you are responsible for SUTA taxes. In the event you have employees in states that require employee SUTA contributions as well, you’ll need to withhold SUTA taxes from their wages.
Not all small business owners pay SUTA taxes: You won’t have to pay SUTA taxes if your small business doesn’t have any employees. If you own a business such as a nonprofit, religious institution, or educational institution, you may be exempt from SUTA as well.
How to Calculate and Pay State Unemployment Tax (SUTA)
You won’t be able to pay SUTA taxes until you sign up for an unemployment tax account with your state. Since this process varies from state to state, it’s a good idea to check government websites in your state for some guidance. If you can’t find the term “SUTA” on these websites, look for “unemployment tax” or “unemployment insurance” as not every state refers to unemployment tax as SUTA. Florida, for example, calls SUTA a “reemployment tax.”
After you have set up an unemployment tax account, your state will send you an unemployment tax rate. Keep in mind that this rate may change periodically or per calendar year. Keep in mind that this rate may change periodically or on a yearly basis. Your industry, how long you’ve been in business for, and the number of unemployment claims filed by former employees will play a vital role in your SUTA tax rate.
Once you know your tax rate, you’ll likely have to make tax deposits on a quarterly basis. You may find that your state has an electronic funds transfer (EFT) you can use to conveniently pay your SUTA taxes online.
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Calculating SUTA Tax: An Example
When answering the question, “How is SUTA tax calculated?,” an example always helps. Each state sets a limit, also called a taxable wage base. Let’s say you operate a small business in New York State. The SUTA wage base is $12,000 for 2022, so you won’t be taxed on any amount over that. Let’s say you qualify for a 4% SUTA rate, and you have three employees. Here’s a breakdown of how much you would pay in SUTA tax for this quarter.
You’ll multiply each employees’ SUTA wage by your tax rate.
|Your SUTA liability
In total, you’ll be required to pay $1,200 for this quarter’s SUTA tax. You can also use a SUTA tax calculator to help with the math. Look up your state’s SUTA tax rate 2023 so you can plan ahead for how much you’ll owe next year.
Are SUTA Taxes Required?
If you’re an employer, you’re legally obligated to pay SUTA taxes. While it may be tempting to avoid paying them, doing so is considered tax evasion and can lead to serious penalties, which can take a toll on your business and future.
Don’t hesitate to contact your payroll company or a tax expert in your state if you are confused about SUTA taxes or need help paying them. They know the ins and outs of SUTA taxes and can simplify the process.
Difference Between FUTA and SUTA Tax
The Federal Unemployment Tax Act (FUTA) is similar to SUTA in that it’s a tax paid by employers. Essentially, FUTA is a payroll tax paid by employers on employee wages. Unlike SUTA tax, however, the FUTA tax rate does not vary by state (unless you’re located in what is called a credit reduction state as determined by the Department of Labor).
The FUTA tax rate is 6.0% for all employers, regardless of where they do business, as set by the Internal Revenue Service (IRS). This tax applies to the first $7,000 they pay to each employee during the year. It’s important to note that mileage reimbursement, insurance premiums, and other fringe benefits do not count towards the $7,000.
Let’s say you own a marketing firm and have an employee who receives $4,000 in annual wages. You’d multiply $4,000 by 0.06 to get $240, the amount of FUTA taxes you’ll have to pay for them. For any employee who earns more than $7,000 annually, you’d multiply $7,000 by 0.06 to get $420, which is the maximum you’ll pay in FUTA taxes for any employee.
If you pay your SUTA taxes on time, you may receive a tax credit of 5.4% by the federal government. This will decrease your FUTA tax rate to 0.6%. Unfortunately, you won’t be able to claim the entire 5.4% credit if you live in a credit reduction state.
Final Word: SUTA Tax
If you’re a small business owner, it’s essential to understand what SUTA tax is so you know how and when to pay it. Rather than looking at SUTA tax in a negative light, think of it as a financial obligation that allows you to run your own business and pursue your passion. Don’t be afraid to outsource or automate your SUTA tax payments to make your life easier.
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Common Questions about SUTA
Who assigns the SUTA tax rate to an employer?
Each state assigns the tax rate to an employer, and they typically send out a new rate each year. There is a range for each state’s SUTA tax rate, and your total tax liability will depend on what rate the state assigns to you.
Is SUTA a withholding tax?
No, SUTA tax is not something you would withhold from your employees’ paychecks. You are responsible for paying SUTA tax as an employer.
How can I lower my SUTA rate?
Only hire when you need help, and make sure your employees are set up for success. Letting employees go and having them claim unemployment benefits will likely increase your SUTA rate. You can also choose to hire independent contractors that can’t draw unemployment.
Is SUTA paid annually or quarterly?
Employers must pay SUTA tax each quarter. Otherwise, you could face potential fines and consequences from your state. Due dates depend on your state.
This article was originally written on February 11, 2020 and updated on February 8, 2023.
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