State Unemployment Tax Act (SUTA)

One of the many responsibilities that employers have is making sure that all payroll taxes are accurately withheld and timely paid. We often hear about income taxes, Social Security, and Medicare. Have you heard about the SUTA tax? 

What is the State Unemployment Tax Act (SUTA) Tax? 

The State Unemployment Tax Act (SUTA) tax refers to a payroll tax that employers pay. The purpose of SUTA tax is to fund state unemployment insurance programs which are set up to provide unemployment insurance benefits to workers who have lost their jobs that were not their fault. This means that a person who was terminated from work, for example, because of “gross negligence” or “gross misconduct” will not be eligible for unemployment benefits because losing their job was a result of their own doing. On the other hand, a person who lost their job because they were, for example, not the right fit for the job or were discriminated against is eligible for unemployment benefits. 

What are other names for State Unemployment Tax Act (SUTA) Tax?

Some people may call SUTA tax “state unemployment insurance”, “SUI”, or “Reemployment Tax.” They essentially mean the same thing and serve the same purpose. 

Who needs to pay SUTA Tax? 

Usually, most U.S. states require only employers to pay SUTA tax. However, there are three states that, aside from employers, also require employees to pay SUTA tax. These states are Alaska, New Jersey, and Pennsylvania. If you are an employer whose business is operating in Alaska, New Jersey, or Pennsylvania, you are required to withhold SUTA tax from your employees’ wages. 

There some businesses that may be exempted from paying SUTA tax such as nonprofit organizations and educational institutions. Because the rules on exemption may vary from state to state, we encourage you to check your state laws. 

Is it the same as Federal Unemployment Tax Act (FUTA) Tax?

While both FUTA and SUTA taxes essentially were created for the same purpose, they are not the same. Both FUTA and SUTA taxes are types of unemployment taxes to fund unemployment insurance. The difference lies in where the funds go. FUTA tax funds the federal government’s action to oversee the unemployment programs at the state level. Similarly, SUTA tax is collected by each state and funds unemployment insurance benefits at the state level. 

When necessary, a state can borrow funds from FUTA funds. This can happen during times of high unemployment in the state. 

What is the meaning of SUTA Wage Base? 

When we say SUTA wage base, this refers to the maximum amount of employee income that can be subject to SUTA tax. Each state has its own SUTA wage base for all employers. 

What is the meaning of SUTA Wage Rate? 

The SUTA rate varies from employer to employer, depending on the SUTA tax rate assigned by the state. The reason for this is that each state sets their own tax rates for employers which are paid to the state department of labor.

The SUTA tax rate is based on experience ratings or how much experience they have as an employer. For example, a state may assign all new employers the same SUTA tax rate which can be changed once the employers gain more experience. In some cases, a state can also assign a SUTA tax rate based on the industry where the business belongs. Businesses with a high turnover rate such as construction may have a higher SUTA tax rate than others. With this in mind, employers need to keep abreast of their SUTA tax rates. They may be subject to yearly assessment to adjust SUTA tax rates. 

How is SUTA Tax calculated? 

As mentioned above, the SUTA wage base and SUTA tax rate can differ. For our example, let’s use the following information:

Let’s say a new employer is based in Florida. Florida’s new employer SUTA tax rate is 2.7% and the SUTA wage base is $7,000. With these pieces of information, we can determine that the first $7,000 of an employee’s earnings are subject to SUTA tax at 2.7%. 

$7,000 × 0.027 = $189