Tax

What Is SUTA Tax

04.22.2020

Emptech's founder, Jeff Aleixo

Author

Jeff Aleixo

SUTA tax FUTA tax reducing tax costs

In addition to withholding payroll taxes from employee wages, employers in every state are required to make contributions to their state’s unemployment agency. These funds are used to cover the amount of unemployment compensation that individuals in that state receive in case they become unemployed. Because of the penalties associated with not paying SUTA tax, it is vital that employers understand what their tax obligations are and take necessary steps to maintain tax compliance.

Who Pays SUTA Tax

The State Unemployment Tax Act (SUTA) requires employers to pay a type of payroll tax. States may also refer to SUTA tax as State Unemployment Insurance, SUI, or Reemployment Tax in Florida. The money collected through SUTA tax funds the state unemployment insurance to employees who lost their job through no fault of their own.

SUTA tax is experience rated which means that tax rates for a company reflect the cost of the benefits that company’s former employees have received. An organization with a higher amount of unemployment claims will typically see their unemployment tax rate increase over time. On the other hand, companies with fewer claims often get a rate reduction.

In most states, SUTA is an employer-only tax. However, states like Alaska, New Jersey, and Pennsylvania require both the employer and the employee to pay SUTA taxes. If employees come from such states that require employee SUTA contributions, employers are obliged to withhold SUTA tax from their wages. Also, not all employers have to pay SUTA taxes. Some states may exempt certain businesses such as non-profit, religious or educational institutions.

Most states require employers to pay SUTA every quarter of the calendar year. In California, for example, quarterly returns for SUTA and other state payroll taxes are due on April 30th, July 31st, October 31st, and January 31st. To get exact dates, employers have to check their state’s tax authority.

Use this comprehensive guide to help you understand the payroll taxes and potentially reduce your rates, while maintaining effective tax compliance.

SUTA Tax Wage Base and Tax Rate

A taxable wage base is the maximum amount of an employee’s income that can be taxed. The SUTA wage base is the same for all employees in one state. However, each state’s wage base is subject to change each year. This is why employers have to stay up-to-date with adjustments in this area and ensure they are withholding the correct amount of SUTA tax for each employee.

Each state sets a different range of tax rates depending on factors such as industry, how many former employees received unemployment benefits, and experience. Every employer has to sign up for a SUTA tax account with their state government. Employers can register online at a state’s government website or register for an account by mailing a form. Each state has a different process for obtaining an account and employers should determine the necessary steps beforehand.

Once employers register for an account, they obtain information such as employer identification number, what their contribution rate is and what their state wage base is. Many states give newly registered employers a standard new employer rate that eventually changes. Employers can receive an updated SUTA tax rate within one year or later, depending on the state. In most cases, states have a range of unemployment tax rates for established employers and each state assigns employers with a rate within this range.

Difference between FUTA and SUTA Tax

The Federal Unemployment Tax Act (FUTA) is similar to SUTA because it is also paid by employers. However, while SUTA funds a state’s unemployment insurance, the money collected through FUTA funds the federal government’s oversight of each state’s individual unemployment insurance program. In the case of high unemployment, states can borrow from FUTA funds to provide benefits to unemployed workers.

Unlike SUTA tax, the FUTA tax rate does not vary by state and it is 6.0% for all employers, regardless of where they do business. FUTA tax rate applies to the first $7,000 employers pay to each employee during the year.

Under federal guidelines, employers that make their state SUTA contributions on time can reduce the amount of FUTA taxes. If a company makes its state unemployment contributions regularly and without any late payments, the federal government grants a 5.4% credit against any necessary FUTA payments. As a result, a business’ FUTA costs can be reduced by 90%, bringing the FUTA tax rate down to 0.6%.

Distinguishing between employees and non-employees can pose a challenge for every employer. Read on to find out how to avoid independent contractor misclassification, increased tax bills, and penalties.

Controlling Unemployment Claims to Reduce SUTA Contributions

One way for employers to reduce costs for state unemployment insurance is by keeping experience levels down. In order to achieve this, an employer needs to have documentation of oral and written warnings, disciplinary actions and any other evidence that employees had the ability to maintain their position if they followed the rules and guidelines. Such evidence can help employers invalidate employees’ ability to collect unemployment claims. As a result, they can get a SUTA tax rate reduction.

This is where employers need to take into account the new Coronavirus Stimulus Bill, created to reduce the impact of an economic downturn caused by the global coronavirus pandemic. Among other changes, the bill extends both the eligibility and the benefit amounts for unemployment related to the current emergency. Therefore, nearly everyone will be eligible except people who have the ability to continue their job working remotely online or are already on paid sick leave or other leave benefits due to the work interruption.

Also, the Coronavirus Stimulus Bill extends the duration of regular unemployment benefits from the normal 26 weeks to 39 weeks for affected workers. In addition to this, it funds a new Federal Pandemic Unemployment Compensation benefit of $600 per week on top of the regular unemployment benefit through the end of July 2020.

Understanding and Reducing SUTA Tax Costs

Dealing with unemployment taxes and costs related to them can be a real struggle for every employer. Still, no matter how complicated this may seem, employers can manage SUTA tax in a successful and effective way. Apart from making an effort to make timely payments, employers can reduce their SUTA tax costs by lowering the rate of employee turnover, and by minimizing the number of former employees who file for unemployment benefit payments during the calendar year. Also, with the right electronic solution, employers can easily navigate the various tax deadlines and fluctuating payments, while reducing the number of costly mistakes.

Ultimately, making payments on time, keeping experience down, maintaining the proper documents, and using the appropriate tax management software can make the process of fulfilling SUTA tax obligations easier and less costly.

Outsource payroll taxes to ensure meeting necessary deadlines, preventing any mistakes, and avoiding any potential penalties.
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