When running a business, there are many responsibilities pulling you in different directions. Payroll taxes are one of the big ones—and they can cause plenty of confusion for business owners of all sizes. The terms SUTA and SUI are common terms in the business world, but they are not terms that most people are familiar with or understand. However, employers and employees must understand what these terms mean in order to stay compliant and avoid penalties.
In this article, we’ll break down the meaning of SUTA, the difference between SUTA and SUI, who pays it, and how it impacts your business. By the end of this guide, you’ll understand what SUTA is, how it works, and how to stay compliant.
The State Unemployment Tax Act (SUTA) is a state payroll tax that funds programs and benefits for unemployed citizens. Nearly all employers are required to pay into this system. The money from the SUTA tax goes into the state unemployment fund, which provides temporary income to eligible workers who lose their jobs through no fault of their own. Without SUTA, states would not have the funding for the state unemployment fund and would not be able to support the unemployed workers when they need it most.
Your business’s SUTA rate will depend on the state you operate in. Each state sets its own wage base (the maximum amount of wages subject to the tax) and its own tax rates. In general, your rate is influenced by how many unemployment claims your business has had in the past—so businesses with high turnover usually pay more.
In short, the purpose of SUTA is to provide temporary income assistance to unemployed workers and help bridge the gap while in between jobs.
Yes, State Unemployment Tax Act (SUTA) and State Unemployment Insurance (SUI) are the same tax. The terminology is different depending on the state or payroll provider. However, both terms can be used interchangeably to describe the same tax that employers must pay to help support state unemployment benefits. For example, in Maine, the tax is referred to as the “State Unemployment Tax Act.” But, in Florida, it is called the “Reemployment Tax.”
In most states, employers are the ones responsible for paying SUTA. Your business is required to pay SUTA tax if you:
However, in some states, both the employer and employee pay SUTA taxes. Although this is limited to just a few states, which are
Nonprofit organizations or charity organizations with 501(c)(3) status are generally exempt from and do not have to pay SUTA. In addition, many states exempt wages paid to employees under age 21, particularly in agricultural or seasonal work.
The State Unemployment Tax Act (SUTA) is implemented in every state. However, some states have different names, and it can be referred to as something different, such as State Unemployment Insurance (SUI), contribution tax, reemployment tax, or unemployment benefit tax. Regardless of what it’s called, the function is the same: to provide income for people who lost their jobs through no fault of their own.
Your SUTA liability is based on two main factors:
In short, employers with steady employment and few layoffs often benefit from lower rates.
While SUTA is a state-level tax, it works a lot like its federal counterpart, FUTA. Employers need to:
If your business has employees in multiple states, you’ll need to register and file separately in each state where employees perform most of their work.
Note: Most payroll providers, including Paper Trails, will collect and remit all payroll taxes, such as SUTA for their clients.
Yes, unless your business is exempt for one of the reasons listed above. Federal Unemployment Tax (FUTA) is a federal payroll tax, and State Unemployment Tax (SUTA) is a state payroll tax that both need to be paid.
Organizations that are exempt from SUTA could include nonprofit organizations, government employers, and religious, charitable, and educational institutions. However, it is important to review state law to determine if your organization is exempt.
In order to register for SUTA, employers must apply through their state’s labor or unemployment agency. The recommended method for speed and accuracy is registering online. Then, after registration, the state assigns an employer account number and SUTA rate to your business.
SUTA on your paycheck refers to the State Unemployment Tax Act. For most employees, SUTA does not appear as a deduction on their pay stub. Only employees in Alaska, New Jersey, and Pennsylvania pay SUTA taxes. In all other states, SUTA is paid entirely by their employer.
SUTA tax credits are reductions employers can get on their Federal Unemployment Tax (FUTA) for paying their State Unemployment Tax (SUTA) on time. This credit greatly reduces the overall federal unemployment tax an employer owes.
SUTA dumping is a tax evasion scheme that employers use where they manipulate state unemployment tax systems to avoid high unemployment income tax rates. This can be done by transferring employees or payroll to a new business entity, sometimes known as a “shell company.” The goal is then to effectively shift the higher tax burden to other employers in the state and help reduce their own liability. This is unfair to other employers, but more importantly, illegal. States are actively prosecuting and penalizing employers across the country involved in this scheme.
SUTA dumping is also commonly referred to as state unemployment tax avoidance and tax rate manipulation.
SUTA is one of the most important payroll taxes your business pays. SUTA is important because it helps fund unemployment benefits for workers who lose their jobs while also giving employers tax credits that can help lower their federal unemployment costs. By paying SUTA, businesses stay compliant with state and federal laws but also help employees who are facing unemployment.
Understanding how SUTA works makes it less intimidating and easier for employers. By complying and paying on time, your business can avoid penalties and reduce the risk of unnecessary extra costs.