State Unemployment Tax Act: Explained

Payroll and payroll taxes are complicated. Where many organizations drop the ball is understanding State Unemployment Tax Act (SUTA) rates. While most accountants and business owners are familiar with FUTA, SUTA is more challenging as the tax varies from state to state. Here we take a look at SUTA tax and how it affects your payroll tax filing.

What is SUTA Tax?

State Unemployment Tax Act is also known as SUTA, state unemployment insurance and SUI. It is a payroll tax that goes towards the state unemployment fund. SUTA rates, wage bases and rules are determined by the state. In some states, just the employer contributes to the tax, while in others the employee must also contribute. The tax is used to support unemployed workers who lose their jobs through no fault of their own.

How Are SUTA Rates Determined?

Each state has its own SUTA tax rate as well as their own taxable wage base. The base determines the maximum amount used to calculate an employee’s contribution based on their gross income. However, employers also receive an assessment or tax rate which tells them how much they are required to pay.

When are SUTA Rates Changed?

It is important for employers to keep up to date with SUTA rates as they can increase from year to year. Because of the assessment aspect of the tax, in some cases increased rates often only apply to certain industries. Depending on where your organization operates, the rate can change on an annual basis.

Who Pays SUTA Tax?

As mentioned, in some states employees contribute to SUTA, but in all states, the employer pays SUTA taxes. The states requiring employee contributions are Alaska, New Jersey, and Pennsylvania. Even when the employee contributes to the tax, it is still the employer’s responsibility to make the deductions at payroll and remit the money to the state on the employee’s behalf.

Do Non-Profit Organizations Pay SUTA Tax?

Yes, all employers contribute to SUTA tax. In this case, you can either pay into your state unemployment tax program or reimburse the state when an unemployment claim is paid out to one of your former employees. If you choose the reimbursement option keep in mind you have to pay out 100% of the employee’s benefits.  

How is Your Organization’s SUTA Tax Rate Determined?

Each state sets SUTA rates based on the following:  

1. Wage base: This rate is based on an employee’s gross income and the maximum amount used to calculate SUTA tax. Any income exceeding the wage base does not require SUTA tax payments. These rates are managed by the American Payroll Association. It is your responsibility to keep up with current rates.
2. Tax rate: This is the SUTA tax rate set by your state. In most cases there is a minimum and maximum rate which ranges based on the following criteria:  

• How long you have been in business
• Your industry’s rate of turnover
• Your organization’s unemployment claims history for former employees

When you set up an account, your state considers these factors to determine your SUTA tax rates. From then on you must keep up to date with changing rates.

How To Calculate and Pay Your Organization’s SUTA Tax

SUTA taxes are due quarterly on January 31, April 30, July 31 and October 31. They are applied to each individual employee using the wage base and your organization’s specific assigned rate. To avoid mistakes or what appears to be avoidance due to miscalculations it makes sense to use payroll software. The software ensures you remain compliant and avoid unpleasant surprises due to inadvertent underpayment.

Can Employers Reduce the Amount of SUTA They Pay?

Yes and no. While rates are set in stone for the year, because the government considers industry turnover and your organization’s layoff history, ensuring you manage your workforce scheduling and hiring wisely helps minimize the risk of layoffs. The lower the number of unemployment claims you have from former employees, the lower your rate. Focusing on best practices in hiring to avoid bad hires, while also nurturing employees to improve satisfaction helps reduce turnover. This is made easier with the following:

• Employee tracking software: Improving your hiring and employee career management process helps increase employee retention.
• Time management: Ensure you always operate efficiently to avoid layoffs using workforce scheduling software to provide optimal labor coverage.
• Streamline processes: You can also consider HR software tools to streamline operational processes for hiring, talent retention, and talent planning to optimize your workforce.
• Improve workflow: HR Workflow Optimization software automates tasks while identifying inefficiencies in scheduling, employee onboarding, payroll and more.

Using comprehensive software solutions allows you to audit pay cycles to ensure proper SUTA best practices, while also optimizing your workforce to avoid increased SUTA rates.

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About the Author

Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.