What is SUTA tax? Definition and how to calculate it

Most small business owners start their own companies with a passion for a product or service. But most don’t get excited about processing payroll. Businesses have multiple tax obligations and acronyms to keep track of, including SUTA and FUTA taxes. 

SUTA is the State Unemployment Tax Act, which requires employers to pay unemployment taxes into their respective state’s unemployment program. FUTA is for the Federal Unemployment Tax Act that requires payments into the federal uninsurance program. 

In most states, SUTA and FUTA do not show up on your employee’s pay stub because you (the employer) pay the full amount. Let’s look at exactly how SUTA taxes work, how to figure out your rate, and how to calculate them: 

How SUTA tax works 

SUTA is a payroll tax employers pay to the state. Money from SUTA taxes goes into a state unemployment fund on behalf of that state’s employees. The fund pays unemployment insurance to employees who become unemployed through no fault of their own, such as through company layoffs. 

When you hear of someone collecting unemployment, they are likely drawing from SUTA funds. The SUTA tax rate companies pay varies depending on the state in which they do business. Your state’s labor department will provide guidelines for paying SUTA taxes. 

Calculating your SUTA tax 

While all employers must pay the SUTA tax, the exact amount each company must pay varies. Currently, two factors determine your SUTA tax: your company’s taxable wage base and SUTA tax rates.

Taxable wage base

To calculate your SUTA tax, you’ll need to know how much of each employee’s wages are subject to the SUTA tax. Known as the taxable wage base, this is the maximum amount of earnings you can tax in a calendar year for an individual worker. 

Each state sets its taxable wage base. For example, California has a taxable wage base of $7,000, while Colorado has a base of $20,400 for 2024. 

Tax rate

Next, you’ll need to know your state’s SUTA tax rate. Each state has a range of minimum and maximum tax rates for state unemployment taxes. For example, California’s SUTA tax rate range for 2024 is 1.5% to 6.2%, while Colorado’s range is 0.75% to 10.39%. 

The tax rate for your company will be within your state’s range but depends on an assessment of your company. Your experience rating is part of that assessment. The number of former employees who file for state unemployment benefits affects your experience rating. 

For instance, if a company has a large number of workers who file for unemployment in a given year, you may have a higher tax rate. As a result, businesses with the highest employee turnover rates often pay higher unemployment tax rates.

SUTA vs. FUTA tax

Properly calculating and paying SUTA taxes is crucial, as it also impacts the amount of FUTA tax a business must submit. Each business receives a credit toward FUTA taxes based on SUTA tax payments.

In general, employers must pay 6% of gross wages, up to a cap of $7,000 per worker, to fund FUTA for each employee. In all 50 states, employers pay the same 6% rate for every worker, but the federal government may change the rate in future years.

Note that SUTA and FUTA taxes are also known as unemployment taxes. Meanwhile, FICA taxes make up Social Security and Medicare taxes.

SUTA tax credits 

If you file and pay your SUTA taxes on time with the state, you may be eligible for a tax credit when it comes time to file your annual FUTA taxes. You can report the SUTA tax you pay using Form 940 to get the tax credit—as long as your business is not located in a credit reduction state.

A credit reduction state owes money to the federal government’s unemployment fund to pay their workers’ unemployment insurance. You can check the Department of Labor’s updated list of credit reduction states. 

FUTA offers a maximum 5.4% tax credit to companies that pay their state unemployment contributions on time. When you subtract that 5.4% FUTA credit from the standard 6% rate, this greatly reduces the amount of FUTA tax your company owes to a much lower 0.6%.

Example of SUTA tax calculation

Say you run a small marketing agency in Texas with six employees. 

For 2024, Texas’ taxable wage base for employees is $9,000, and the tax rates range from 0.25% to 6.25%. 

Assume that your company’s SUTA tax rate for 2024 is 2.7%. Using the formula below, you would need to pay $1,458 into your state’s unemployment fund:

($9,000 taxable wage base x 2.7% tax rate) x 6 employees = $1,458 SUTA taxes

Given that you must pay FUTA tax only on the first $7,000 of each employee’s wages, your total wage base is $7,000 for each of your six employees, or $42,000. Your FUTA tax liability is $2,520 ($42,000 x 6%).

Recall that you can get a 5.4% FUTA tax credit for paying your SUTA taxes on time. Your FUTA tax rate is 0.6%. So, in the case of our Texas agency, you’d have a much lower FUTA tax liability of $252 ($42,000 x 0.6%) after the tax credit. 

Tips on keeping your SUTA tax rate low

Your company may not be eligible for the FUTA tax credit if you don’t file and pay its SUTA taxes on time. Here are some tips to keep your SUTA tax rate as low as possible: 

• Know your state’s filing schedule: Many state unemployment tax programs require tax deposits each quarter, which is similar to the FUTA requirements. 
• Reduce employee turnover: To improve employee retention, find workers with diverse skill sets who you can transfer to new departments or locations as the needs of your business change.
• Implement human resource policies: Clearly define the responsibilities of HR and payroll departments to ensure you’re keeping detailed documentation with employees. 

Good HR practices allow you to lay out expectations of employees, as well as keep track of potential issues with employees. If an employee files a wrongful unemployment claim, use your documentation to improve the chances of getting the claim denied and thereby avoid paying out unemployment insurance.

Find peace of mind come tax time 

Unemployment taxes like SUTA taxes are an important component of payroll taxes. While payroll is notoriously complicated, you can easily navigate the various tax dates, rates, and payments with a good system in place. 

Luckily, there are payroll software programs available, like QuickBooks Payroll, that offer a full suite of payroll tools for businesses of any size. With software to simplify your SUTA and FUTA calculations, you can get back to doing what you do best—running and growing your business.

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