If you prioritized business owners' favorite responsibilities, payroll taxes would likely fall towards the bottom of the list. Unless you have a deep history in payroll processing, it can be difficult to stay on top of all the ins and outs of tax obligations—from Social Security and Medicare to federal and state unemployment taxes and beyond.
But it doesn’t have to be a burden. Here are essential elements to managing one type of employer tax, unemployment insurance, from filing the correct form to being proactive in controlling your tax rate.
The Differences Between FUTA and SUTA
What is FUTA?
The Federal Unemployment Tax Act (FUTA) is a payroll tax employers pay to fund unemployment benefits for employees who’ve lost their jobs. FUTA is not deducted from employee pay.
The FUTA rate is 6% with a wage base of $7,000, the maximum amount of an employee’s income that can be taxed per year. That means after the first $7,000 in annual wages you don’t have to pay any more FUTA tax.
The federal government offers a credit of up to 5.4% to companies that pay their state unemployment taxes on time – bringing the FUTA rate down to 0.6%. FUTA is the same for all businesses – except nonprofits, who do not have to pay FUTA – and doesn’t change (unless there is new legislation to do so).
FUTA taxes are due quarterly unless your FUTA tax liability for the quarter is $500 or less. In that case, you carry the amount due forward to the next quarter.
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.
Read More: Payroll Tax Rules for Employers
Filing Your State Unemployment Forms is Critical
When you start a business with employees, you must apply for an employer identification number (EIN) with the IRS and with your state. Once you receive your state employer number, you can file the appropriate form to establish a SUTA tax account, or a state unemployment insurance account, with your state’s unemployment tax agency.
The U.S. Department of Labor has a helpful list of state unemployment insurance agencies. 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.
After setting up a SUTA tax account and calculating SUTA taxes each payroll, you have to deposit the taxes with your state agency. The frequency varies by state, and you can find this information in the same area you find your state forms.
How Employee Turnover Affects Your SUI Rate
Unlike all other employer tax rates, your SUI tax rate is one over which you have a certain level of control. Your employee turnover rate is the key.
A company with high turnover will likely pay a higher rate because SUI liability is based in part on former employees filing for unemployment and receiving benefits. The more employees you let go, the more opportunities for those employees to file unemployment claims.
Turnover is especially problematic for new businesses because they haven’t had the opportunity to pay into the unemployment pool used to cover unemployment claims. When a new business has former employees who receive unemployment benefits, the state pays on the company's behalf and then recoups its money by raising that business’s tax rate.
Another way turnover affects your overall unemployment tax liability is if an employee leaves halfway through the year and you hire a replacement, you wind up paying taxes on both employees up to the wage base, rather than on just one employee. This particular disadvantage of employee turnover also applies to both FUTA and SUTA.
Updating Rates is Essential
You'll receive a letter from your state with your company's SUI rate each quarter, either confirming no change in your rate or notifying you of a rate change. Having the correct rates in your payroll system is vital to stay on top of your employer payroll taxes and maintain your SUTA rate.
If you are updating the payroll system yourself, enter rate changes and ensure they are effective on the date in the letter.
If you are using an outside company to process payroll, be sure to share that letter with your accountant or the support contact with your payroll provider. This will ensure accurate SUI tax calculations and payments are made, keeping you in 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 you can control your rate and keep it low by being proactive. That begins with filing the correct forms and accurately describing your business and its practices. After that, remember to be careful when hiring. Take time to research and interview candidates to find individuals who are entirely suitable for your business. During the hiring process, use good documentation practices, including having your new employees signify they’ve read and understood their job descriptions.
Then, be sure to have thorough onboarding and training to set your employees up for success. As your employee-employer relationship progresses, have them sign off on any performance reviews or new policies. Should you need to let a person go, handle their termination with care.
For more information on FUTA and SUTA, or for help understanding the many aspects that surround them, contact your CPA or payroll company.