Filing taxes, whether federal or state, probably isn’t one of the tasks you enjoy as an employer. Crunching numbers and processing payroll can seem like they require endless spreadsheets and papers full of calculations. Although these tasks can be tedious, they’re important at both the federal and state level. On the state side of things, your company must pay state unemployment taxes, also known as SUTA.
The State Unemployment Tax Act is a tax that states use to fund unemployment benefits. Employers pay SUTA tax, also known as state unemployment insurance (SUI) tax, based on their employees’ wages. Most states require employers to remit their SUTA taxes quarterly.
Not all employers are required to pay SUTA taxes. Some nonprofit organizations can instead reimburse their state directly for any unemployment benefits that former employees go on to use.
Independent contractors are responsible for paying their own taxes. If you have contractors on your team, you do not have to calculate and pay SUTA tax on their behalf.
New Jersey, Pennsylvania and Alaska are the only three states that require employers and employees to pay SUTA tax. If your business operates in one of these states, you need to also withhold SUTA tax from each of your employees’ paychecks.
Each state determines its own standards for collecting SUTA taxes. The amount you’ll pay depends on your company’s taxable wage base and tax rate.
Employers pay SUTA tax on behalf of each employee according to their state’s wage base. A wage base is the maximum amount of an employee’s annual gross income that can be used to calculate SUTA tax. This amount varies by state.
Employers do not pay SUTA tax on income exceeding their state’s wage base. For example, North Carolina’s 2021 SUTA wage base is $26,000 annually. If an employee makes $18,000 per year, their taxable wage base is $18,000, and their employer calculates SUTA based on this amount. If an employee makes $60,000, their employer only pays taxes on the first $26,000, since this is the maximum amount that can be considered for the tax.
The other factor in the SUTA tax is the tax rate. Each state sets its own minimum and maximum rate. This range typically changes every year. Several factors determine where your tax rate will fall within your state’s range:
You can find your annual SUTA rate on your state’s department of labor or unemployment website. Browse this list of contact information for each state’s department to find the appropriate authority to contact.
To calculate the amount of SUTA tax you’ll need to pay for each employee, multiply your tax rate by the taxable wage base of their income.
Here’s an example: Joshua is the owner of a new business in New Jersey. After checking the state’s department of labor website, he finds that his 2021 tax rate is 2.6825% and that New Jersey’s wage base is $36,200. Mark, Joshua’s employee, makes $41,000 per year. Though Mark makes more than the wage base, his taxable wage base remains $36,200. This means Joshua’s SUTA tax payment for Mark will be 0.026825 times $36,200, or $971.07.
To start paying SUTA tax, you need to set up an unemployment insurance tax account through your state. Take the following steps to apply for a SUTA account, though the process may vary by state.
You can find the specific steps to apply for your SUTA account on your state’s department of labor or employment website.
To determine if you are required to pay SUTA tax and submit any attendant reports, take these steps:
While your state’s standards largely determine your SUTA tax payment, you can exert some influence on your rate as well. Below are some tips to keep your SUTA rates as low as possible:
You can calculate how much you need to pay for SUTA tax based on your state’s wage base and tax rate.
While states use SUTA tax to fund their unemployment insurance programs, the federal government provides assistance through the Federal Unemployment Tax Act (FUTA). This tax helps all states administer their programs for unemployment insurance and job services. During periods of high unemployment, FUTA allows states to borrow from the federal fund to pay benefits.
While some states require employees to pay SUTA tax, only employers are required to pay FUTA tax. Employers pay this tax annually. The FUTA tax rate is a flat 6%, and the federal wage base is $7,000. If you pay your SUTA tax in full and on time, you may be eligible for a tax credit that lowers your FUTA tax rate from 6% to 0.6%.