The State Unemployment Tax Act (SUTA) was passed to fund unemployment compensation payments to workers who have lost their jobs. SUTA, along with the Federal Unemployment Tax Act better known as FUTA, collects funds and distributes them to the unemployed.
Unemployment taxes are an important component of payroll and something that many business struggle with. Here is an overview of the details of SUTA and its impact on your business.
How SUTA works
SUTA is a program that is funded by employers in each state, and the unemployment benefits are processed by a state agency. The Department of Labor provides guidelines that each state must follow.
Here’s a complete list of state agencies responsible for SUTA as well as other employment regulations like licensing and labor laws:
There are two factors that determine the tax calculation: the wage base and the tax rate. Each state sets a range of tax rates for state unemployment taxes, and the tax rate assigned to a particular firm is referred to as the assessment. A company’s assessment is based its experience rating, which is determined by the number of former employees who file for state unemployment benefits.
If a company has a large number of workers who file for unemployment, the firm will be assigned a higher tax rate. As a result, businesses with the highest employee turnover rates pay higher unemployment tax rates. The state may change the experience rating each year.
The wage base is the maximum amount of earnings taxed in a calendar year for an individual worker, and base is determined by each state. Both the wage base and the rate of tax may change from one year to the next.
If your business can reduce employee turnover, you may be able to keep the state unemployment tax rate from increasing. Make sure that you invest the time needed to effectively interview, train, and evaluate workers. If your employees perform manual work or must use heavy machinery, set up a comprehensive safety program to reduce the risk of injury. These strategies can help you minimize your state unemployment tax rate.
The Impact on FUTA Tax
SUTA has an impact on the amount of federal unemployment tax payments a business must submit. Employers pay 6% of gross wages, up to a cap of $7,000 per worker, to fund federal unemployment taxes (FUTA) for each employee. Generally, employers pay the same 6% rate for all workers, and the federal government may change the rate in future years.
This is only a business expense, and no FUTA taxes are deducted from a worker’s pay. Companies receive a FUTA tax credit for unemployment contributions paid to a state.
Assume, for example, that your total wages for the first quarter of 2018 are $21,000. The $21,000 is the first $7,000 of payroll you paid to three different employees. Your FUTA tax liability is ($21,000 X 6%), or $1,260.
FUTA offers a 5.4% credit for all state unemployment contributions if your state is a credit reduction state. Credit reduction states borrow money from the federal government to fund state unemployment liabilities, and many states participate in the program.
The credit reduces the net amount of FUTA tax your company owes to (6% – 5.4%), or 0.6%. The company liability after the tax credit is ($21,000 X 0.6%), or $126.
SUTA Filing Deadlines and Tax Deposits
Many state unemployment tax programs require tax deposits each quarter, which is similar to the FUTA requirements. This system allows a company’s accounting department to process the federal and state unemployment tax deposits at the same time. When deposits are submitted, each business also provides a report explaining the deposited amounts. Finally, each company must submit an annual report on state and federal unemployment tax payments.
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