SUTA Tax: An Employer’s Guide To The State Unemployment Tax Act
If you’re a new business or have employees for the first time, one of the responsibilities you’ll need to worry about is payroll and payroll taxes, including unemployment taxes. To complicate matters, there are two types of unemployment taxes you need to pay: the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) tax, also known as state unemployment insurance (SUI) tax. We’ve written about FUTA before so here we’ll just focus on SUTA, which can be a bit more challenging because each state has a different program with unique requirements.
At Complete Payroll Solutions, we’ve been providing outsourced payroll to clients for over 18 years. One of our core offerings with any of our payroll packages is payroll tax filing, including SUI. To help you understand your responsibilities when it comes to withholding and remitting these taxes to your state revenue agency, here we’ll cover:
- What is SUTA tax
- How does SUTA work with FUTA
- Who pays SUTA tax
- What is the SUTA tax rate
- How do I calculate SUTA tax
- How do I pay SUTA
- What are the penalties for not paying SUTA
After reading this, you’ll know what steps you need to take to properly pay SUTA tax in your state and avoid costly penalties.
What is SUTA tax?
The State Unemployment Tax Act (SUTA) tax is typically a payroll tax paid on employee wages by all employers. In some cases, however, the employee may also have to pay SUTA taxes. Either way, the money generated from the tax goes into a fund that is administered by the state within guidelines established by federal law.
How does SUTA work with FUTA?
Like SUTA, FUTA is a payroll tax paid by employers. The revenue raised by FUTA tax, along with a state’s unemployment insurance program, provides for unemployment benefits for employees who lose their jobs through no fault of their own. While the federal government generally just oversees the state programs, in some cases, a state may borrow from FUTA funds to provide benefits to their unemployed.
Who pays state unemployment tax?
As we just explained, in the majority of states, the employer is responsible for paying SUTA taxes, and that includes nonprofit organizations. While nonprofits that qualify as Section 501(C) (3) organizations don’t have to pay federal unemployment taxes, they must still either pay into their state unemployment tax program or self-insure by reimbursing the state for unemployment claims paid out to their former employees. In the latter cases, the employer is responsible for reimbursing the state for 100% of all employee benefits received.
While SUTA is generally an employer tax, there are three states that also require employees to pay state unemployment taxes. These are:
- New Jersey
In these states, you’d need to withhold SUTA tax from employees’ wages and remit it to the state.
What is the state unemployment tax rate?
Unlike FUTA, which just has one rate employers pay, each state can set its own standards for SUTA taxes. There are two factors that make up what you’ll pay as an employer:
- Your state’s wage base: The wage base is the maximum amount of an employee’s gross income that can be used to calculate SUTA tax. That means you don’t pay the tax on any income that exceeds the wage base. For example, the taxable wage base for 2022 in Massachusetts is $15,000. If an employee makes $50,000 a year, you’re only paying taxes on the first $15,000. You can find a list of the wage base for each state from the American Payroll Association.
- Your state’s tax rate: The other component to what you’ll pay in SUTA tax is the tax rate your state sets. Each state usually sets a minimum and maximum rate and your business will fall somewhere within that range. You can find these by checking your state’s unemployment insurance or labor department website. For example, in Rhode Island for 2021, the range was 0.78% to 9.59%. To determine your specific rate, there are several factors that can impact that determination:
- How long you’ve been in business: New businesses typically have a standard tax rate. Then, after a period of time, for instance, three years, you’ll pay a new tax rate. In Rhode Island, the new employer rate was 0.95% in 2021.
- Your industry: If you’re in an industry that has a high rate of turnover, you’ll likely pay a higher tax rate than other businesses. For example, construction companies often have higher SUTA tax rates.
- Unemployment claims history: The number of former employees who have filed for unemployment contribute to what’s known as your experience rating. The higher this rating, the higher your SUTA tax rate will be.
After taking into account these factors, you will be assigned your tax rate by your state’s unemployment insurance or labor department when you set up an account. Keep in mind this rate can change as often as annually. To help reduce your tax rate, you’ll want to minimize employee layoffs so that means creating a culture that drives employee satisfaction and hiring best-fit workers and avoiding bad hires.
How do I calculate SUTA tax?
Once you know your assigned tax rate, you’ll be able to calculate the amount of SUTA tax you’ll need to pay for each employee. Let’s say your business is in New York, where the lowest SUTA tax rate for 2021 was 2.025% and the highest was 9.825%, and you’re assigned a rate of 4.025%. You have an employee who makes $45,000 a year. Since the wage base in New York for 2021 was $11,800, your tax payment for your worker would be 0.04025 times $11,800 for the year, or $474.95.
How do I pay state unemployment tax?
In order to pay your SUTA tax, you’ll first need to create an account with the appropriate state agency. In New Hampshire, for example, you’d created an account with New Hampshire Employment Security. To do this, you’ll need several pieces of information such as your business name, type of entity, employer identification number, and date of first payroll. Once you complete the registration process, you’ll receive confirmation, an account number, and your SUTA tax liability.
What are the penalties for not paying?
SUTA taxes are generally due each quarter. These would be due January 31, April 30, July 31, and October 31. In most states, you can make payments online through your state agency. Just be sure to submit the taxes on time or you could be assessed a late fee. In Rhode Island, employers who fail to file quarterly tax reports and make contributions by the due date will be assessed interest at the rate of 1-1 ½ per month and penalties of $25.00 for failure to file quarterly tax reports and 10% for failure to make contributions.
How to Best Manage Your SUTA Tax Requirements
There’s a lot to take into account when paying SUTA taxes. And since remitting your payments accurately and on time is essential to avoiding steep penalties, you may think about outsourcing your payroll to a provider who can handle calculating and paying your payroll taxes on your behalf.
If this sounds like you, you may be wondering if Complete Payroll Solutions would be a good fit for your company. We’re an ideal payroll partner if you:
- Have between 1 and 1,000+ employees
- Want an experienced team with over 18 years of history processing payroll and payroll taxes
- Prefer a local team of payroll specialists with a dedicated professional to answer any questions you may have