Managing payroll is an important part of being a small business owner, and there’s much more to it than ensuring employees are paid accurately and promptly. There are many state and federal tax requirements for business owners to abide by, including the obligation to contribute to each state’s unemployment services fund.
Unemployment taxes can be confusing as the numbers often vary from year to year and state to state. Here’s what small business owners need to know about SUTA taxes to help stay in compliance and avoid costly financial penalties.
What is SUTA?
The State Unemployment Tax Act (SUTA) is intended to help cover costs for former workers who request unemployment benefits. This is a required tax and must be paid by any company who has a W-2 employee other than the business owner. Some states refer to SUTA tax as unemployment tax or unemployment insurance.
Companies must begin paying this tax as soon as a worker is hired and continue paying until certain economic thresholds are reached. Companies are responsible for paying SUTA taxes regardless of whether they have a former employee who requests unemployment benefits.
There are a few states (Alaska, New Jersey, and Pennsylvania) where employees are also required to pay SUTA taxes.
It’s important for employers to understand that there is both a state and federal component to these taxes. The Federal Unemployment Tax Act (FUTA) is another unemployment benefit preparation fund that employers are legally obligated to contribute to.
However, unlike SUTA taxes where the amount varies state by state, FUTA taxes are the same for all employers. The FUTA tax rate is 6.0% and applies to the first $7,000 paid to an employee annually.
How much is SUTA?
There are two important variables to calculating SUTA tax: wage base and tax rate, both of which will vary state by state. It’s crucial that small business owners take the time to understand their state’s requirements to ensure taxes are paid appropriately.
Wage base is how much of an employee’s income the state can tax each calendar year. This amount is the same for all employees in a given state, so employers must pay taxes on every employee’s salary until they reach this wage base. In 2021, these sums ranged from a low base of $7,000 in Arizona, California, Florida, and Tennessee to a high base of $47,400 in Hawaii.
The next piece of the SUTA tax puzzle is tax rate. In addition to being variable by state, SUTA tax rates may also be variable by business. Newer businesses are often assigned higher rates than more established businesses, and states may also charge a higher rate depending on the industry.
To calculate your business’s SUTA tax, utilize this formula:
State tax rate x wage base = SUTA tax
To help you determine your tax requirements, here is a state-by-state breakdown of 2021 wage bases and tax rate ranges, including tax rates for new versus established businesses.
How to Pay SUTA
While SUTA tax rates can be confusing, your state has resources to guide you to the correct amount and facilitate payments.
Follow these 3 steps to manage your SUTA tax payments:
- Register for an Employer Identification Number (EIN). This unique number, also referred to as a Federal Tax Identification Number, is how the government identifies businesses. It is a free service and, in most cases, generates a number immediately.
- Sign up for an unemployment tax account with your state. During the process you will be asked to provide information such as number of years in business and what industry you operate in to help the state determine your SUTA tax rate.
- Pay taxes owed promptly. In addition to avoiding costly late fees, paying taxes on-time may help you reduce your federal tax burden. A tax credit of 5.4% on FUTA taxes is often granted to businesses who stay current with SUTA taxes, reducing the FUTA tax rate to 0.06%. It’s important to note that this tax advantage does not apply to credit reduction states.
Tips to Manage SUTA Tax Costs
One strategy to keep SUTA tax to a minimum is to reduce employee turnover and layoffs as much as possible. By having fewer employees who file for unemployment, your SUTA tax rate is less likely to increase.
As the ins and outs of unemployment taxes can be complicated, it’s a good idea to utilize a reputable payroll service provider. These companies are skilled at paying employees and the IRS in a timely manner, and they can take a large load off of your plate while minimizing costly mistakes.
Additional Resources for Small Business Owners
Dun & Bradstreet offers educational resources and insights to help small business owners realize their dreams of becoming entrepreneurs and growing successful businesses. Explore our website for more small business management tips and inspiration.
The information provided in articles and blog posts are suggestions only and based on best practices. Dun & Bradstreet is not liable for the outcome or results of specific programs or tactics. Please contact an attorney or tax professional if you are in need of legal or tax advice.