Most employers in the United States must pay state unemployment tax, the collection of which is authorized by the State Unemployment Tax Act (SUTA). Although most wages are subject to SUTA tax, certain wages may be exempt. In New York, for example, wages paid to babysitters under 18 years of age, church employees, and certain family members are exempt from SUTA tax. Therefore, it is essential to check with your state unemployment agency to determine which wages are related to SUTA.
Every employer should be aware of two components of SUTA: annual wage base and SUTA tax rate:
Annual Wage Base: The annual wage base represents the maximum amount of wages subject to SUTA tax per employee for the year. For 2018, employers in California and Florida pay SUTA tax on the first $7,000 paid to each employee. Alaska, however, imposes SUTA tax on the first $39,500 paid to each worker. Once the annual wage base has been satisfied for an employee, the employer does not owe any more SUTA tax for that employee for the year.
SUTA Tax Rate: These tax rates are based on varying factors, with the most common being whether the business is new, the employer’s industry (such as construction versus nonconstruction), and the amount of benefits claimed on the employer’s account. Generally, the more benefits claimed on the employer’s account, the higher the SUTA tax rate, which is why it is crucial that you keep turnover at a minimum.
Not Always Only an Employer-Paid Tax
In most states, SUTA is an employer-paid tax. Three states — Pennsylvania, New Jersey, and Alaska — require withholding as well. If you have employees in any of these three states, you must withhold state unemployment tax from their wages at the state-mandated withholding rate and up to the maximum amount of wages allowed for the year.
Impact on FUTA Rate
In addition to paying and withholding applicable state unemployment tax, employers also must file wage reports with the state unemployment agency, usually on a quarterly basis. How you handle these requirements can influence your federal unemployment tax rate.
The Federal Unemployment Tax Act (FUTA) authorizes the IRS to collect federal unemployment tax, which is used to help fund state unemployment programs. Since July 2011, the FUTA tax rate has stayed at 6 percent; and since 1983, the annual wage base has held steady at $7,000. You can take a maximum credit of 5.4 percent against your FUTA tax if:
+ you paid all your state unemployment tax on time,
+ the wages you paid SUTA tax on are also subject to FUTA tax, and
+ your state does not owe the federal government for funds that it borrowed to pay unemployment benefits.
Taking this maximum credit will lower your FUTA tax rate to 0.6 percent.
Call us to learn about the details of SUTA and FUTA.