SUTA, otherwise known as the State Unemployment Tax Act, was created in parallel with the Federal Unemployment Tax Act (FUTA) in 1939 to help reinvigorate the U.S. economy during the Great Depression. Both of these taxes directly support unemployment funds—one at the state level, the other at the federal level. They provide financial assistance to people who have lost their jobs through no fault of their own, meaning those who were not fired or did not quit. These two taxes may seem similar, but they have distinct differences, as you’ll see below.
What is SUTA?
The State Unemployment Tax Act, otherwise known as SUTA, requires employers to pay a payroll tax directly into each state’s unemployment fund. Typically it is only paid by employers, but some states require employers and employees to contribute (Alaska, New Jersey, and Pennsylvania).
SUTA may also be called State Unemployment Insurance (SUI) or Reemployment Tax. There are also states that exempt certain nonprofits and small businesses from paying any SUTA tax.
What is FUTA?
According to the IRS, “The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax.”
How Rippling can help with unemployment taxes
Compliance matters. Ensure your business meets both SUTA and FUTA requirements—automatically—when you use Rippling to report and pay your state and federal taxes.
SUTA and FUTA tax rates
Each state has its own SUTA tax rates ranging from (0.65% to 6.8%)
The wage base limit, or the maximum threshold for which the SUTA taxes can be withheld, also varies by state. SUTA Tax Rates for 2022 can be found here. If you’re using accounting software like Rippling, however, these rates are automatically calculated for you.
Government employers, nonprofits, and educational and charitable institutions are exempt from these taxes. Additionally, wages earned by employees younger than 21 are not required to be taxed. SUTA payments are also tax deductible for employers.
One thing to note is that, depending on where your business is located, the SUTA could fall under another name.
The FUTA tax rate is 6.0%.
The tax applies to the first $7,000 you paid to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. Your state wage base may be different based on the respective state’s rules.
Generally, if you paid wages subject to state unemployment tax, you may receive a credit of up to 5.4% of FUTA taxable wages when you file your Form 940. If you're entitled to the maximum 5.4% credit, the FUTA tax rate after the credit is 0.6%. Generally, you're entitled to the maximum credit if you paid your state unemployment taxes in full, on time, and the state isn't determined to be a credit reduction state.
What do these taxes mean for my business? And how can I lower my rates?
SUTA and FUTA are highly regulated and important taxes on both the state and federal levels. Your business will most likely have to pay both. Your individual tax rate is dependent on many factors, however.
While the details of state and federal tax codes can be impenetrable to everybody other than a trained accountant—the major takeaway is this: businesses that have high employee turnover and/or layoffs will have a higher SUTA tax rate. For those who want to go down the rabbit hole of how layoffs affect unemployment insurance taxes, this piece offers a comprehensive assessment.
As noted above, the FUTA tax rate is fixed and less variable than SUTA, making it easier to estimate your quarterly taxes.
The impact of COVID-19 on unemployment taxes
By January 2021, 75 million unemployment claims were filed due to the pandemic. Because COVID-19 put millions out of work at once, the unemployment system was put under immense pressure and its resources were depleted.
Because the unemployment fund balance plays a major role in determining the rate of taxes, it’s likely your business saw an increase in taxes. It is important to keep track of the current tax rates, as neglecting to pay the accurate amount can result in fines and penalties for your company—and in the worst-case scenario, criminal penalties.
Some things to consider when calculating SUTA for your business:
Where your employees live and work
The funds from SUTA taxes go directly to support the unemployment service of the state where the work was completed. That means, if all your employees are based in one state, you only need to worry about the SUTA rate of that one location. If you have employees based all over the country, a much more common arrangement since COVID, you’ll need to pay each individual state the correct amount.
Your taxable wage base(s)
Because each state sets its own minimum and maximum rates—and because they are subject to change annually—keeping up-to-date on these numbers will help keep your company compliant. As with COVID, we saw the rates change more significantly than usual, so this is an area to watch. For the most accurate and updated information, visit each state’s official website for the finalized SUTA information.
Your turnover rate
Much of your tax rate assessment will be based on the number of employees who filed for unemployment the previous year, so turnover rates are important statistics to keep track of. Whether quarterly or annually, note your stats in an organized fashion so you’re ready to prepare your reports—or, in case of an audit.
Streamlining your unemployment taxes
Without an effective software tool, managing state and local tax laws and keeping up with SUTA reporting, registration, and payments can be a full-time job—and a very manual one at that. Automating the tasks most important to state and federal compliance is a great way to alleviate much of the SUTA compliance burden. Learn more about how Rippling's PEO software can save you hours of tedious admin work and keep your business compliant with SUTA regulations.