If you are a new employer trying to learn about taxes, payroll taxes can get confusing. The fact that both the IRS and state governments levy taxes that sound somewhat identical adds to that confusion.
State Unemployment Tax (SUTA or SUI) is one such example. It’s somewhat like the FUTA tax, but it's not the same.
Or maybe you are already paying this tax quarterly. But knowing more about SUTA will help you plan your taxes better.
Whatever may be the reason, you landed on the right spot. This article covers State Unemployment Taxes (SUTA) in-depth and provides the answers you are looking for.
Unemployment programs are for laid-off employees (who lost their jobs for reasons beyond their control) to have a soft landing. State governments collect funds required for these programs through the State Unemployment Tax (SUTA). It is also known as the State Unemployment Insurance Tax (SUI).
Usually, if you hire employees, you pay this tax quarterly to the state government based on the employee wages (yeah, it is indeed a payroll tax). Your tax responsibilities change slightly if your employees are working in different states. In that case, you pay taxes to every state where your employees are located.
But things can get a little complex when any of your remote employees decide to work from multiple states. In such a situation, you should contact the relevant state authorities.
On top of SUTA, you are also liable to pay FUTA tax to the IRS. However, if your SUTA taxes are cleared in time, and Form 940 is filed, you get tax credits up to 5.4% (which brings down your FUTA to 0.6%).
Usually employees don’t pay this tax. But some states like Alaska, Pennsylvania and New Jersey don't discriminate and collect it from both employees and employers. If you are operating in these states, you must collect employee portions of the tax from their paychecks.
To calculate your SUTA tax, you need to consider two things: wage base and tax rate. All you need to do is multiply the wage base by the tax rate.
The wage base is the upper limit of the taxable employee wage. In simple words, you don’t take into account any wages paid to your employee over this limit while calculating your SUTA tax.
This wage base, however, is not set in stone. This amount varies across the states. For instance, in 2023, the wage base of the state of Florida is $7,000. If you paid an employee $47,500, the taxable wage is $7,000. On the other hand, for an employee you paid $6,500 you will be counting taxes on $6,500, (since it’s under the $7000 limit).
Similar to the wage base, your SUTA tax rate depends on the state you are in. But, unlike the wage base, which is the same for any employer based out of the same state, the tax rate changes from one business to another.
Usually, the state authority considers the following factors:
Your history of employee retention, layoff and other factors have a direct effect on your SUTA tax rate. However, if you are a new employer, you will not have sufficient data. That’s why the rate for new employers and businesses with 3+ years of operation varies.
For example, in Minnesota, the tax rate for experienced employers will be in the 0.1% to 9% range. Any new employer, on the other hand, is subject to a tax rate ranging from 1% to 8.9%.
Certain industries have a high employee turnover rate. Construction is a good example. Because of low wage growth, project-based work and physical demand, workers change companies at a higher rate than other industries.
As expected, the SUTA tax rate is pretty high in those industries. Take Minnesota again, for example. The tax rate for new employers in IT industries is 1%. That number is almost 9X (8.9%) for oil and gas pipeline manufacturers.
Your tax rate can vary based on the number of your former employees who filed unemployment claims. The general rule is, the more the number of applications means higher taxes for you. If you have a history of mass lay off, expect a hefty tax rate.
Imagine you have a 5+ year-old business in Minnesota. In 2023, the state wage base amount was $40,000. The base tax rate is 0.1% and the experience rate for you is 6.9%.
Note: Your SUTA tax rate has two parts: base rate (same for every employer) and experience rate (based on your industry and turnover history).
You hired 3 employees: Remond, Alicia, and Andres. You paid them $50000, $50000 and $35000, respectively.
|Employee||Wage||Taxable Amount||SUTA Tax|
Your SUTA tax (or SUI tax) will be ($2800 + $2800 + $2450) = $8050.
Please note you need to pay this amount in four quarters. But these quarterly payments may not be equally divided. Your quarterly payment depends on how long you worked with an employee and how much you paid to her.
Again consider the previous example. Let’s assume you worked with Remond only from January 31 to May 31, unlike the other two. In that case, your quarterly tax for wages you paid to Remond will be:
As you can see, your quarterly SUI tax liability for Remond’s wages is not the same across all the quarters.
Usually, your state authority sends a letter every December with your tax rate in it. Alternatively, you can check it on your state website.
To start paying SUTA tax, you do need an account through your state first. Though the steps can be slightly different across the states, the following steps are common:
Step 1: Get your Federal Employer Identification Number (FEIN) from the IRS. Either you can use Form SS4 or apply online.
Step 2: Have a look at your state’s website containing information about registration for Unemployment Insurance. Chances are, you can get your business registered online. Your FEIN numbers, business address, and other legal information may be required.
Step 3: In case you can’t register online (for instance, non-profit, or Indian tribe employers can’t register online in New York), you can download relevant forms. You can send completed forms to the state authority by mail.
Step 4: Once your application gets approved, you receive a state employer tax number. This is different from your FEIN. If you are liable to pay SUI tax, you must use it while electronically submitting quarterly combined withholding and wage reporting forms (for instance, Form NYS 45 in New York).
At first glance, you may feel that there is not much you can do to lower your SUTA taxes. After all, you don’t have full control over whether an ex-employee files for unemployment, right?
But you can, in fact, do a few things to lower your SUI taxes:
Your unemployment tax rate is calculated on the basis of the unemployment claims filed by your former employees. And mass layoffs are the number one cause of having a large turnover.
So try to avoid layoffs.
We know that’s easier said than done when the economy takes a nosedive. But you can try alternate solutions like converting full timers into contractors or encouraging temporary pay cuts.
Even without any history of mass layoffs, a high turnover rate is a red flag. If some of your ex-employees file for unemployment rights after leaving your company, that can come back to bite you later.
While employee turnover can’t be zero, you should take measures to minimize it. For instance, you can be proactive about ensuring a judgment free healthy work environment, prompt wage payments and employee satisfaction.
When you are growing, it’s natural to hire many candidates only to realize later some of them don’t add value anymore. At that point, laying off is inevitable (and a high SUTA tax rate follows).
You can avoid the whole situation simply by hiring mindfully. Take account of your goals for growth, requirements and net value a new hire brings to the table. It’s far better to hire an employee who is skilled and will stick around at a higher pay than someone with lower pay and one of his feet on the door.
We already touched on how SUTA (SUI) and FUTA have similarities (and differences). As a business owner, you have to pay them both. So why not take a minute to understand both takes side by side?
- The first difference between these taxes is whom you pay these taxes. The FUTA tax is levied by the IRS, while State authorities take care of the SUTA.
- The standard rate of FUTA is 6% for the first $7,000 wage you pay to your employees. In the case of SUTA, it is the state wage base multiplied by the tax rate determined by the state authority. Therefore, theoretically, the SUTA tax can vary for two identical businesses operating in the same state.
- FUTA tax doesn’t depend on which industry you are in. SUTA tax rate tends to get higher for certain industries.
- Employers are exclusively responsible for paying the FUTA tax. In some states, employees also contribute to SUTA (SUI) taxes.
If you hire employees, you need to pay SUTA (SUI) taxes. However, by hiring intelligently, avoiding layoffs and planning ahead, you can reduce your taxes. Also proper bookkeeping helps you a lot with your taxes. And that’s where Fincent comes in. It’s a bookkeeping solution for business owners (unlike others which are better suited for tax pros). If you want to learn more, click here.
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