How to Calculate and Pay State Unemployment Tax (SUTA)

Close up view of female employee holding box. © Getty Images

By Ryan Lasker, The Blueprint

When a business finds itself in a financial bind, sometimes layoffs feel like the only option.

Unemployment benefit programs step in when employees are let go for reasons outside of their control. Employers pay unemployment tax to their state and the federal government so employees have a softer landing if they’re laid off.

Overview: What is the State Unemployment Tax Act (SUTA)?

When employees lose their jobs through no fault of their own, the state or territory where they work provides temporary compensation while they seek new work.

Through the State Unemployment Tax Act (SUTA), states levy a payroll tax on employers to fund the majority of their unemployment benefit programs. Alaska, New Jersey, and Pennsylvania collect state unemployment tax from both employers and employees.

Employers also pay Federal Unemployment Tax Act (FUTA) taxes. The federal government uses the revenue to cover the administrative cost of state unemployment benefit programs.

Any amount your business pays in SUTA tax counts as a small business tax deduction.

When you pay SUTA taxes on time and file IRS Form 940, your FUTA tax rate goes down as low as 0.4%.

How is the state unemployment tax calculated?

Like other payroll taxes, you pay SUTA taxes on a percentage of each employee’s earnings, up to a certain amount.

Your SUTA tax rate falls somewhere in a state-determined range. States assign your business a SUTA tax rate based on industry and history of former employees filing for unemployment benefits. New companies usually face a standard rate.

Each state decides on its SUTA tax rate range. The ranges are wide: Kentucky’s range, for example, is 0.3% to 9%.

Each state also decides on an annual SUTA limit so that an employee’s earnings after that amount are no longer taxed until the following year.

You might know that Social Security taxes stop after an employee earns $137,700 for the year. The SUTA limit, also called a SUTA wage base, is the same concept.

Calculating a SUTA tax example

Let’s try an example. Imagine you own a California business that’s been operating for 25 years.

Employers in California are subject to a SUTA rate between 1.5% and 6.2%, and new non-construction businesses pay 3.4%. The state’s SUTA wage base is $7,000 per employee.

Since your business has no history of laying off employees, your SUTA tax rate is 3%. You have employees with the following annual earnings:
Barry $25,000 $7,000 $210 ($7,000 * 0.03)
Maya $3,000 $3,000 $90 ($3,000 * 0.03)
Jordan $50,000 $7,000 $210 ($7,000 * 0.03)
Total $78,000 $17,000 $510

You pay SUTA taxes up to the $7,000 state limit for Barry and Jordan. Since Maya made less than the state limit, her SUTA wages are $3,000.

SUTA vs. FUTA: What's the difference?

SUTA and FUTA payroll taxes exist to support state-managed unemployment benefit programs, but they affect business taxes in slightly different ways.
Here are the main differences:

  • Different parts of the government manage FUTA and SUTA. FUTA is federally managed, and states regulate SUTA.
  • The federal government applies a standard 6% FUTA tax rate across industries, and it does not change based on how many former employees file for unemployment benefits. SUTA assigns a different rate to every business based on those two factors.
  • Because states have the autonomy to determine their tax rates, there’s variance among states’ SUTA tax rate ranges.
  • Employees never pay FUTA tax, unlike SUTA, where employees in Alaska, New Jersey, and Pennsylvania must contribute.

How to pay state unemployment taxes

It's common to pay your SUTA taxes with your employee’s state income tax withholding. Usually, that’s monthly or quarterly. Your payroll software can make the payment on your behalf.

Since states individually manage SUTA tax collection, check with your state website or tax software to learn how often SUTA taxes are due.

Let’s return to the California business example and look at just Barry’s quarterly earnings.

Taxable wages $5,000 $7,000 $6,000 $5,000 $25,000
SUTA wages $5,000 $2,000 - - $7,000
SUTA liability $150 ($5,000 * 0.03) $60 ($2,000 * 0.03) - - $210

The business stops paying SUTA tax on Barry’s wages once he makes $7,000, which happens in the middle of Q2.

As Barry’s employer, you remit $150 of SUTA taxes at the end of March and $60 at the end of June. You won’t pay SUTA taxes on Barry’s earnings again until next year.

Common questions about SUTA

Do business owners pay SUTA on their own compensation?

Sometimes. If the IRS considers you an employee in your business, you are subject to SUTA taxes.
Your business structure determines whether you classify as an employee. Businesses treated as C corporations or S corporations for tax purposes must pay SUTA taxes on their owners’ salaries, but sole proprietorships don’t.

Limited liability companies (LLCs) can be taxed many ways, so check with your accountant to see whether you’re subject to SUTA.

How do I reduce my SUTA tax rate?

Your business’s SUTA tax rate can fall anywhere within your state’s range, but you can take steps to reduce your rate.

Most states apply fixed SUTA tax rates to businesses registered in the last two or three years. As they age, their rate is determined by the business’s industry and history of former employees filing for unemployment benefits.

The SUTA rate assignment incentivizes employers not to lay off and fire a high proportion of their employees: Companies with high employee turnover tend to see higher SUTA tax rates.

Some industries are predisposed to higher rates. Some states have separate ranges for construction companies because of the industry’s high rate of employee turnover.

Avoid employee layoffs for a chance at a low SUTA rate. Hire employees with skill sets that serve your business’s changing needs.

If you’ve never laid off an employee and are looking to bring down your SUTA tax bill, consider your hiring practices. Since the tax is paid on every employee’s wages up to the state limit, hiring more full-time workers and fewer part-time workers will bring down your SUTA tax bill.

Going back to the California business example, if you paid just Barry $28,000 instead of paying Barry and Maya $25,000 and $3,000, respectively, you’d save $90 in SUTA taxes.

Barry $28,000 $7,000 $210 ($7,000 * 0.03)
Jordan $50,000 $7,000 $210 ($7,000 * 0.03)
Total $78,000 $14,000 $420

How do I find out my SUTA tax rate?

States generally send a letter every December with your business’s SUTA rate for the following year. If you missed it, look on your state’s tax website.

To make an account, you’ll need your IRS employee ID number (EIN). The IRS doesn’t have a simple EIN lookup tool, but you should be able to find your EIN on one of your business tax documents.

Pay your unemployment taxes on time

Just like all of your small business taxes, it’s essential to pay SUTA taxes on time. Not only is it a required employee benefit, but it can also bring down your FUTA tax rate.

See more at The Blueprint

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