If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.
State unemployment taxes fund the majority of unemployment benefit programs. Here's how to ensure you calculate SUTA taxes correctly for your small business.
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.
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%.
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.
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:
Employee | Annual Taxable Wages | SUTA Wages (up to state limit per employee) | SUTA Liability (SUTA wages * SUTA rate) |
---|---|---|---|
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 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:
It's common to pay your SUTA taxes with your employee’s state income tax withholding. Usually, that’s monthly or quarterly. Your payroll service 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.
Q1 | Q2 | Q3 | Q4 | Total | |
---|---|---|---|---|---|
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.
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.
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.
Employee | Annual Taxable Wages | SUTA Wages (up to state limit per employee) | SUTA Liability (SUTA wages * SUTA rate) |
---|---|---|---|
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 |
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.
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.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.