It’s critical for every employer to understand how unemployment insurance works and what their unemployment insurance obligation is to ensure compliance with employment and tax laws. There are two mandatory unemployment taxes: state and federal. In this post, we’ll focus on how State Unemployment Insurance tax (SUI) works.
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What is SUI tax?
State Unemployment Insurance tax (SUI) pays stipends to any employee who has lost their job through no fault of their own and is actively seeking new employment. In general, this benefit applies to an employee who was laid off; it does not typically apply to an employee who voluntarily quit or was fired for misconduct.
SUI tax may be referred to by a few different names; these are:
- SUTA (State Unemployment Tax Act) or SUTA tax
- Unemployment benefit tax
- Reemployment tax
If you hear any of the above, it’s about SUI tax.
When a former employee claims unemployment insurance, they are typically provided with wage replacement pay from the state’s unemployment agency until the former employee has successfully found work or has reached the end of the time period allotted by the state.
You can contest a former employee’s filing for unemployment insurance if you don’t believe they are eligible. Fine print: rules and requirements vary by state, so be sure to review the state laws that apply to your situation.
Is my company required to pay SUI tax? Are employees responsible for paying for it?
If you have full-time employees, you have to pay SUI taxes to fund state unemployment insurance. The Federal Unemployment Tax Act (FUTA) requires it for every state where your company has employees.
In most states, employees are not responsible for funding SUI and so contributions are not typically withheld from employee wages. However, there are a few exceptions where employees are responsible for making SUI contributions.
These exceptions are:
- New Jersey
What’s the difference between SUI tax (or SUTA tax) and FUTA tax?
SUI tax (aka SUTA tax) and FUTA tax are both unemployment-related payroll taxes.
FUTA is the tax paid by the employer at the federal level; the rate is 6% of an employee’s first $7,000 in taxable wages—but it can be credited by up to 5.4% depending on how much an employer pays in SUI taxes, and whether the state repaid any federal loans related to the state’s unemployment obligation. You can read the fine print regarding the FUTA credit reduction as it relates to SUI on this IRS webpage. In other words: your FUTA could be as low as .06%. To report your FUTA tax, be sure to fill out IRS Form 940.
SUI tax (or SUTA tax) is the unemployment tax that employers (and in the few states named above, employees) pay at the state level. Rates vary for SUI. Keep reading for details.
Where can I find SUI tax (SUTA tax) on a pay stub?
Below is how FUTA and SUI appear on a Gusto pay stub for an employee residing in California; the employer contribution is displayed under “Employer Taxes.”
So, how much does SUI cost and how are payments made?
Typically, employers pay for SUI quarterly through their share of payroll taxes. (Exceptions include New Jersey, Pennsylvania, and Alaska, where a portion of SUI taxes are deducted from the employee’s paycheck.)
Pro tip: before you hire your first employee, check your state’s regulations to be sure that you file your company’s SUI documentation according to your state’s laws.
How to calculate SUI tax
Each state taxes employers to fund SUI. Your SUI tax rate is specific to your business, and it’s based on the “wage base” set by each state, along with an “experience factor.”
Wage Base: Let’s say your business—and all of its employees, for the sake of simplicity—are in New York. New York’s SUI wage base for 2020 is $11,600. That much is straightforward. The next numbers in the calculation (the experience factor) need to be customized to your specific business type, the number of former employees who have collected unemployment benefits, and the number of years your business has been contributing to SUI.
Experience: To continue with our New York example, the 2020 tax rate for new employers is 3.2%. That 3.2% is made up of the following: 2.5% basic tax + 0.625% subsidiary tax + 0.075% reemployment-services fund contribution = 3.2%. (Sidenote: How long your business qualifies as a “new employer” varies by state.)
The tax 2020 tax rate for experienced employers in New York ranges from 0.6% to 7.9%.
How to get help calculating SUI tax
As you can see, this is a complicated DIY activity, especially if number crunching and compliance checking isn’t your thing. Oh, and the calculation gets trickier if you have employees who work in multiple states. You’ll typically pay SUI to each state where the work is taking place. We recommend touching base with your online payroll service or CPA. You can also get help from your state government by signing up for an SUI tax account.
2020 has been a tough year. Will my SUI tax rate change?
Due to the COVID-19 pandemic, many employers were forced to lay off or furlough workers. If you were one of these employers, it is possible that your tax rates may increase moving forward, but fortunately, due to the unusual nature of the pandemic, many states have crafted legislation that will prevent this from happening. Find out what to expect in your state with this state-by-state SUI 2020 tax guide.
This post was originally published on January 31, 2018.
Quick note: This is not to be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance. Find an accountant