Becoming an employer means taking on responsibilities such as running a payroll. These are responsibilities you need to fulfill towards your employees, and one of those responsibilities is withholding certain payroll taxes, such as the State Unemployment Tax Act (SUTA).
Ensuring that your business complies with government regulations every year with the ever-changing standards can be tough. As an employer, especially for new employers, it is important to know what is SUTA, how do you calculate SUTA tax, and what are the current SUTA rates.
This article helps you navigate through the process of fulfilling your SUTA tax responsibility with ease. First, read Real Check Stubs’ Pay Stub Abbreviations and Acronyms Decoding Tips to breeze past acronyms and abbreviations as you read.
What is the State Unemployment Tax Act (SUTA)?
The State Unemployment Tax Act, commonly referred to as SUTA tax, is a state unemployment insurance program requiring employers to pay towards a fund. The SUTA tax was established to benefit workers who lost their jobs. States use the fund to pay unemployment insurance benefits to unemployed workers.
Depending on the SUTA rate and SUTA wage base, employers contribute to the SUTA fund, also known as the Reemployment Tax or State Unemployment Insurance (SUI), in some states every quarter. However, in other states such as Alaska, Pennsylvania, and New Jersey, the SUTA program requires employers and employees to pay.
Additionally, some states provide exemptions to businesses that employ fewer employees and nonprofit organizations from paying the SUTA tax. The employer has the responsibility to withhold the tax and make payments.
Who Pays SUTA Tax?
Now that you have a brief background of what is SUTA, let us now go to who pays SUTA expenses. The State Unemployment Tax Act is a type of payroll tax, such as the Federal Unemployment Tax Act (FUTA) and the Federal Insurance Contributions Act (FICA), which employers must pay on behalf of their employees. These contributions provide financial support to displaced workers in each state.
Though most states only require employers to pay, some states also involve employees to contribute. As said earlier, in Alaska, New Jersey, and Pennsylvania, workers must also pay towards the insurance fund. Employers in these three states should withhold the SUTA tax from their employee's paychecks and remit it to the state.
There are also states that exempt certain businesses from paying SUTA. These states do not require nonprofit organizations and businesses which employ few employees to pay state unemployment taxes.
SUTA Tax Rates and Wage Base Limits
To better understand SUTA tax, there are a couple of critical components that one should be aware of considering the SUTA wage base and SUTA rates.
SUTA Tax Rates
SUTA rates by state, as well as the taxable wage base differ from each other. The tax rates vary from state to state and are updated periodically. Specific industries with higher rates of turnovers might experience an increase in SUTA tax rates.
SUTA rates in each state typically range from 0.65% to 0.68%. When a business registers an employer, the state would give an assessment and would generally tell the employer what SUTA tax rate they have to pay.
In many states, employers would receive a standard new employer SUTA rate, with each state having different percentages. If an employer gains more experience in their business, the state will assign a new rate.
States could also base tax rates depending on your industry. For example, construction industries would typically have higher SUTA rates than those businesses in non-construction industries. As such, the new employer rate in Ohio for 2019 is 2.7%. However, the new construction employer rate is 5.9% for 2019.
If an employer conducts business in a state that does not assign a standard new employer rate, they would have to wait until the state assigns one. The rate changes as the business grow. Additionally, the number of unemployment claims made to the state by employees who lose their jobs contributes to this change.
To find out what a new employer's SUTA rate is, follow the steps below.
1. Sign up for a tax account with your state by filling out a SUTA tax form.
2. Wait to receive your new employer contribution rate from the state
3. Get updated SUTA rate from your state
SUTA Wage Base
Like the SUTA tax rate, each state dictates its own SUTA wage base or SUTA limit, which is also subject to change each year. A taxable wage base refers to the maximum amount from an employee's paycheck that can be taxed. It is the threshold on which the employer could withhold SUTA taxes.
All employers in a state use the same SUTA limit. Washington state employers use the wage base of $52,700 for 2020. This means that all employers not exempt from withholding SUTA expense in Washington should contribute towards the fund on an employee's wages until they earn this amount.
Employers need to stay updated with their state's SUTA wage base to ensure that they are withholding the correct amount of payroll unemployment tax for each employee.
Remember that both new and experienced employers in the same state use the same SUTA limit, but they differ on the SUTA rate.
How to Calculate SUTA Tax?
SUTA tax calculation requires employers to know the state unemployment tax rate and taxable wage base per employee in their respective states. Each state assigns a standard SUTA rate for new employers. On the other hand, businesses with a longer experience would have a different SUTA tax rate.
Calculating an employer's SUTA expense is as easy as multiplying the SUTA rate with the taxable wage base per employee. For example, a new employer in Kentucky running a non-construction business would need to pay up to $283.50 in SUTA taxes per employee in 2019. The amount is calculated by multiplying the new employer rate in Kentucky for 2019, 2.7%, with the taxable wage base for 2019, which is $10,500.
$10,500 x 0.027 = $283.50
Meanwhile, a new employer running a business in the construction industry in Kentucky would have an unemployment tax rate of 9.75% in 2019 instead of 2.7%. This means that a new employer could pay up to $1,023.75 in SUTA taxes per employee. The taxable SUTA wage base remains the same for both businesses in the construction and non-construction industries. So, the tax amount is taken by simply multiplying 9.75% with $10,500.
$10,500 x 0.095 = $1,023.75
Note that both businesses stop paying SUTA tax once the employees' wages reach the designated state wage base limit for the year.
SUTA Rates by the US States
The table below shows the state wage base SUTA limit and the SUTA rate for both new and experienced employers for each state in 2021.
|State unemployment tax rates|
|State||SUTA new employer tax rate||Employer tax rate range||SUTA wage bases|
|Alabama||2.70%||0.65% – 6.8% (including employment security assessment of 0.06%)||$8,000|
|Alaska||Standard rate 2.57% (2.07% employer share; 0.50% employee share)||1.5% – 5.9%||$43,600|
|Arizona||2.00%||0.08% – 20.6%||$7,000|
|Arkansas||3.10%||0.30% – 14.2% (including solvency surtax)||$10,000|
|California||3.40%||1.5% – 6.2% (+ emergency 15% surcharge)||$7,000|
|Colorado||1.70%||0.71% – 9.64%||$13,600|
|Connecticut||3.00%||1.9% – 6.8%||$15,000|
|Delaware||1.80%||0.3% - 8.2%||$16,500|
|Florida||2.70%||0.29% – 5.4%||$7,000|
|Georgia||2.70%||0.04% – 7.56%||$7,000|
|Hawaii||3.0% (+ 0.01% E&T Rate)||Up to 5.8%||$47,400|
|Idaho||1% (including the workforce rate tax of 0.03%)||0.207% – 5.4%||$43,000|
|Illinois||3.18%||0.2% – 6.4%||$12,960|
|Indiana||2.50%||0.5% – 7.4%||$9,500|
|Iowa||1.00%||0.0% – 7.5%||$32,400|
|Kansas||2.70%||0.2% – 7.6%||$14,000|
|Kentucky||2.70%||1.0% – 10%||$11,100|
|Louisiana||Varies||0.09% – 6.2%||$7,700|
|Maine||2.31% (including CSSF rate of 0.07% and UPAF rate of 0.13%)||0.69% – 6.01%||$12,000|
|Maryland||2.60%||2.2% – 13.5%||$8,500|
|Massachusetts||Not available||Not available||$15,000|
|Michigan||2.70%||6.8% – 8.1%||$9,500|
|Minnesota||Varies||Base rate (0.1% – 0.5%) + experience rating (maximum 8.90%)||$36,000|
|Mississippi||1.0% (1st year), 1.1% (2nd year), 1.2% (3rd year)||0.0% – 5.4%||$14,000|
|Missouri||2.38%||0.0% – 6.0% (does not include maximum rate surcharge or contribution rate adjustment)||$11,000|
|Montana||Varies||0.0% – 6.12%||$35,300|
|Nebraska||1.25%||0% – 5.4%||$9,000; $24,000|
|Nevada||2.95%||0.25% – 5.4%||$33,400|
|New Hampshire||2.7% (including AC rate of 0.4%)||Not available||$14,000|
|New Jersey||2.8% (including the Workforce Development and Supplemental Workforce Funds); Employee rate of 0.425% (including the Workforce Development and Supplemental Workforce Funds)||0.4% – 5.4%||$36,200|
|New Mexico||1.0% or the industry average rate, whichever is greater||0.33% – 5.4%||$27,000|
|New York||3.13%||0.6% – 7.9% (including RSF tax of 0.75%)||$11,800|
|North Carolina||1.00%||0.06% – 5.76%||$26,000|
|North Dakota||1.02% (positive balance); 6.09% (negative balance)||0.08% – 9.69%||$38,500|
|Ohio||2.70%||0.3% – 9.3%||$9,000|
|Oklahoma||1.50%||0.3% – 7.5%||$24,000|
|Oregon||2.60%||1.2% – 5.4%||$43,800|
|Pennsylvania||3.69%||1.2905% – 9.9333%||$10,000|
|Rhode Island||1.16% (including the 0.21% Job Development Assessment)||1.2% – 9.8%||$24,600; $26,100|
|South Carolina||0.55% (including the 0.06% contingency surcharge)||0.06% – 5.46%||$14,000|
|South Dakota||1.20% (+ 0.55% investment fee)||0% – 9.5%||$15,000|
|Tennessee||2.70%||0.01% – 10%||$7,000|
|Utah||Varies||0.2% – 7.2%||$38,900|
|Vermont||1.0% (for most employers)||0.4% – 5.4%||$14,100|
|Virginia||2.50%||0.1% – 6.2%||$8,000|
|Washington||Varies||0.0% – 6.86%||$56,500|
|West Virginia||2.7% (for most employers)||Not available||$12,000|
|Wisconsin||3.05% for new employers with payroll < $500,000; 3.25% for new employers with payroll > $500,000||0% – 12%||$14,000|
|Wyoming||Varies||0.48% – 9.78%||$27,300|
How to Lower the SUTA Tax Rate for Employers?
The State Unemployment Tax Act is a mandatory payroll tax that some employers think they have control over. To some extent, they do. However, each state sets its criteria for state unemployment insurance tax rates and wage base. Additionally, these rates vary for each employer.
Generally, new employers receive a standard "new employer" rate. Over time as the business grows, these employers would receive an "experience rating," lower or higher than the new employer rate. The experience SUTA rate depends on how many past workers have claimed unemployment benefits on the employer's account.
Employers having high employee turnover and frequent layoffs would typically have a higher SUTA expense. Employees who lose their jobs would claim unemployment benefits with the state. Factors such as the nature of business, whether construction or not, and the overall payroll size would affect the rate an employer receives.
Employers may feel powerless against some of the determinants. However, there are ways to lower the SUTA tax rate. Consider the following routes to help you decrease your tax payments.
1. Hire only when needed
Before hiring an employee, ensure that they qualify and that you would truly need them in your company. Letting employees go because you do not need makes them eligible for unemployment benefits, likely increasing your SUTA rate.
2. Help employees perform better
When employees are terminated for gross misconduct, most likely, they will not qualify for unemployment benefits. However, employees terminated due to poor performance or lack of skills are eligible for the insurance program. Reduce the probability of firing employees due to poor performance by providing them resources they would need to improve, such as proper training and tools.
3. Hire independent contractors
Legally, you could avoid unemployment insurance tax payment by using independent contractors instead of hiring an employee. However, if you decide to implement this strategy, make sure you comply with all mandatory requirements for independent contractors. This includes the Internal Revenue Service's applicable state tests and "right-to-control" tests.
4. Contest suspicious unemployment claims
Suspicious or dubious unemployment claims could involve past employees reporting false information or filing a claim to the state workforce agency to receive benefits even if the employer terminated them rightfully with gross misconduct. Before fighting an unemployment claim, consult with a state unemployment insurance expert and ensure that you have sufficient supporting documents to back up your version of events.
5. Make voluntary contributions
Many states allow employers who receive an experience rating to pay a "buydown" contribution voluntarily. This cancels all or part of the insurance tax charged to their account, effectively reducing their SUTA tax rate.
6. Consider alternatives to layoffs
Via your state's work-sharing program, you could reduce your employees' work hours as an alternative to layoffs. This reduces employee turnover, thereby reducing unemployment claims and your SUTA rate.
7. Provide outplacement services
Help displaced employees find a job quickly by providing outplacement services and a substantial severance package. This would make them less likely to file for unemployment benefits.
8. Monitor your SUTA tax rate
Monitor your SUTA rate closely. If you notice a spike for unknown reasons, contact and notify your state's workforce agency and ask for an explanation.
SUTA Tax for Self-Employed Individuals
In most states, unemployment insurance for independent contractors or self-employed individuals does not exist. You must be employed under an employer who pays FUTA and SUTA taxes to receive an unemployment benefit.
Self-employed individuals are not listed as employees. Additionally, like employers who hire self-employed individuals, contractors do not pay into the unemployment insurance fund themselves.
Paying SUTA Tax to Your State
Employers are responsible for reporting their SUTA expenses to the state as well as making payments. You would need to have an unemployment tax account with the state. Typically, you would need to make regular quarterly SUTA tax payments based on the unemployment tax rate given by the state each year.
Many states allow employers to fill out SUTA tax form and pay their state unemployment insurance payments online. Verify with your state whether you could make payments on your SUTA tax liability using electronic filing. Additionally, contact your state for more details on reporting and depositing your unemployment taxes.
As an employer, contributing towards the State Unemployment Tax Act is your responsibility. The SUTA tax helps unemployed workers with their daily expenses. The state program provides displaced workers with unemployment insurance that would benefit them.
Just like any of your small business taxes, the SUTA tax is an essential payroll tax that needs to be paid on time. Not only is it a required employee benefit, but it could also help bring down your Federal Unemployment Tax Act rate.
Now you could answer an employee whenever they ask the question “What is SUTA on my paycheck?”. Visit our website, Real Check Stubs, for more must-read articles to help employers run their business efficiently.