It can be difficult to stay on top of tax obligations — from Social Security and Medicare to federal and state unemployment taxes. Here are essential elements to managing one type of employer tax, unemployment insurance, from filing the correct form to being proactive in controlling the tax rate.

The Differences Between FUTA and SUTA

What is FUTA?

The Federal Unemployment Tax Act (FUTA) is an employer-only payroll tax to fund unemployment benefits. The standard FUTA rate is 6% on the first $7,000 of taxable wages per employee. After reaching that wage base threshold, employers stop paying FUTA taxes. Nonprofits are exempt from FUTA.

Employers are responsible for quarterly FUTA tax payments through the Electronic Federal Tax Payment System. Those who pay their state unemployment tax in full and on time are eligible to receive a FUTA tax credit of up to 5.4%, effectively reducing the FUTA tax rate to 0.6%.

Due to the COVID-19 pandemic’s widespread unemployment, many states borrowed from the Federal government to cover unemployment benefits, resulting in outstanding loans. Consequently, employers in affected states will experienced increased FUTA taxes for 2023, including a 0.3% credit reduction in the first year and an additional 0.3% for each subsequent year until the loan is fully repaid. States with FUTA credit reductions for 2023 are California and New York at .6% and the Virgin Islands at 3.9%.

What is SUTA?

The State Unemployment Tax Act (SUTA) serves the same purpose but at the state level. For most states, state unemployment insurance (SUI), is an employer-only tax. However, SUI is also an employee tax in Alaska, New Jersey, and Pennsylvania.

Unlike FUTA, every state has a different SUTA rate and wage base. Additionally, when it comes to SUTA rates within a single state, there is not one rate all employers pay. SUI rates can range from as low as 0.5% to as high as 14%. How is this possible?

Each state has its own method for determining SUI rates and factors may include the number of former employees who’ve filed unemployment claims and the balance in your unemployment insurance account, your average taxable payroll for a given time period, the age of your business, and the industry in which you operate.

States may charge new companies a set rate for a period of time until an experience rate can be determined. An experience rate is based on actual taxes deposited and unemployment claims paid. States may also assign a higher rate to companies with high churn, like construction, hospitality, or staffing.

Tennessee, for example, has a wage base of $7,000 for 2019 and a new business rate of 2.7%. That means as a new employer you pay 2.7% of the first $7,000 of every employee’s annual salary. After you’ve reached that $7,000 threshold, you stop contributing. Established businesses have the same wage base but have a different tax rate, which they receive from the state.

Filing Your State Unemployment Forms is Critical

Employers must obtain an Employer Identification Number (EIN) from the IRS and from their state. Once they have their state employer number, they can request a SUTA tax account (state unemployment insurance account) from the state’s unemployment tax agency.

Employers must then deposit SUTA taxes with their state agency after each payroll, with deposit frequencies varying by state. If you have trouble with the process, your CPA or payroll company can help by showing you where to find your state’s specific form, how to fill it out, and where to submit it.

How Employee Turnover Affects Your SUI Rate

The SUI rate is the only employer tax rate employers can actively control by reducing turnover. High turnover increases the rate, as SUI liability is based, in part, on former employees filing for unemployment and receiving benefits.

This can be a especially problematic for new businesses because they haven’t contributed to the unemployment pool used to cover claims. If former employees of a new business claim unemployment benefits, the state covers the cost and raises the business’s tax rate to recoup the funds.

Turnover also affects overall unemployment tax liability. Then an employee leaves halfway through the year and a replacement is hired, employers pay taxes on both employees up to the wage base, not just one. This particular disadvantage of employee turnover also applies to both FUTA and SUTA.

Updating Unemployment Tax Rates is Essential

Each year, employers receive a letter from the state with their company’s SUI rate. Keeping the payroll system updated with accurate rates is crucial to manage employer payroll taxes and maintain the SUTA rate.

If employers update their payroll system, the must enter rate changes and effective dates. If outsourcing payroll, sharing the letter with their accountant or payroll provider should ensure accurate SUI tax calculations and compliance.

Ignoring Unemployment Insurance Claims Can Be Costly

When you lay off or dismiss an employee from your company, they can claim unemployment insurance. Most of these claims are legitimate, and you have three weeks to respond. If you don’t answer, that person automatically receives unemployment benefits.

If you think someone is making a false claim to receive benefits, you can object to it. Look for anything that may seem suspicious, like an incorrect salary, and reply to your state department with the necessary documents to challenge the claim.

Being Proactive is Key to Controlling Your SUTA Rate

Paying FUTA and SUTA taxes is unavoidable, but employers can control their SUTA rates by taking proactive steps. This starts with accurately filing the necessary forms and describing the business and its practices. Effective hiring methods, including clear and understood job descriptions and thorough candidate research and interviews, can make a difference. Comprehensive onboarding and training set employees up for success. Throughout the employee-employer relationship, obtaining sign-offs on performance reviews or new policies and handling terminations with care is crucial.

For more information on FUTA and SUTA, or for help understanding the many aspects that surround them, contact your payroll provider or CPA.

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