SUTA Tax Guide: What is SUTA and Who Pays it?

SUTA Tax Guide: What is SUTA and Who Pays it?

SUTA Tax Guide: What is SUTA and Who Pays it?

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As a small business owner, you can enjoy a flexible schedule, unlimited earning potential, and a number of other perks. One drawback of owning a small business, however, is SUTA taxes. If you were previously a traditional 9 to 5 employee, SUTA tax probably didn’t apply to you. 

You were responsible for Social Security and Medicare taxes but not SUTA. Now that you’re an employer, rather than an employee, it’s important to understand what SUTA is and how it may affect your small business.

What is SUTA Tax?

The State Unemployment Tax Act, better known as SUTA, is a form of payroll tax that all states require employers to pay for their employees. SUTA is a counterpart to FUTA, the federal unemployment insurance program. The money collected through SUTA funds the state unemployment insurance to 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. So, how much will you have to pay in SUTA tax as a small business owner? Your SUTA tax rate will depend 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 lay off many employees 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 non-profit, religious institution, or educational institution, you may be exempt from SUTA as well. 

How to Pay SUTA Taxes? 

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’ve 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 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. 

Are SUTA Taxes Required? 

Keeping tabs on your business credit report or free business credit scores is optional. If you are an employer, however, you are 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. 

The FUTA tax rate is 6.0% for all employers, regardless of where they do business. It 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. 

This article was originally written on February 11, 2020.

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