State Unemployment Tax Act (SUTA)

What Is SUTA Tax?

SUTA stands for the State Unemployment Tax Act. The SUTA tax is a required payroll tax that all employers must pay, and the money goes into the state unemployment fund. When a formerly employed worker needs to collect unemployment, they receive payments from the SUTA program when they lose their job.

What Is the Difference Between SUTA & FUTA Tax?

SUTA refers to the taxes paid at the state level, but there's also a federal equivalent. This portion is guided by the Federal Unemployment Tax Act (FUTA).

FUTA Meaning

FUTA taxes go into a fund that covers the federal government’s oversight of the states’ individual unemployment insurance programs. During times of high unemployment, a state may borrow from FUTA funds as necessary to help provide benefits for their unemployed workers.

Who Pays SUTA Tax?

In some states, both the employer and the employee pay SUTA taxes, but this is limited to Alaska, New Jersey, and Pennsylvania. Everywhere else, only the employer pays. If you have employees (not 1099 contractors), you should be paying this tax. If you have workers in states that require employees to contribute, you'll need to withhold SUTA tax from their wages and then remit it to their state.

What Is the SUTA Tax Rate?

There's no single SUTA rate for every employer—the state assigns one to each organization. An employer’s rate may be based on how many former employees have filed UI claims or how much experience they have as an employer. Some states set flat rates for all new companies. Once the employer has been in business for a while, the state will adjust its rate accordingly.

An employer’s rate may also be determined by industry. For industries with higher turnover (such as construction), the SUTA tax rates will likely be higher because more of their employees need to use the system.

How to Calculate SUTA Tax

Every employer in a state will receive an assessment, or SUTA tax rate, they’re required to pay. That rate is updated periodically and may differ from year to year. Every state also determines its own SUTA taxable wage base (i.e., how much of an employee’s wages are subject to this levy).

Take Oklahoma, for example:

Source: Oklahoma Employment Security Commission

Let's say Brenda just opened a new retail business in Tulsa, OK, this year. The amount she needs to pay is calculated like this: $27,000 x 1.5% (wage base x new employer tax rate). Assuming her employees earn more than the threshold, she'll need to pay $405.00 per employee per year (until the state eventually adjusts her rate).

Who Is Exempt from SUTA and FUTA?

Unemployment insurance (from SUTA funds) must be paid to workers who lose their jobs through no fault of their own (e.g. layoffs or company downsizing). Employees who quit their jobs are not eligible for unemployment benefits.

However, employees who've been dismissed by their employer may still be eligible, depending on the circumstances. For example, someone who loses their job due to “gross misconduct” would not be eligible, but someone let go for just not being the right fit or not having the right skills might still receive benefits.

Additionally, the former employee must be actively searching for a new job, file weekly or biweekly claims, and meet other requirements to get paid.

Business Tax Exemptions

In some cases, a business might be exempt from paying SUTA tax. For instance, a business with only a handful of employees may not have to pay. Also, 501(c)(3) organizations, such as charities, private foundations, and nonprofits, aren't required to pay state unemployment taxes. Instead, they may reimburse the state for their unemployment claims.

These exemptions vary from state to state, so check your department of labor or department of taxation for more details. If your organization meets the requirements, you’ll need to fill out an application for recognition of exemption with the IRS.

SUTA vs. SUI

The SUTA is implemented in each state. However, some states might call it something slightly different, such as State Unemployment Insurance, or SUI. In Florida, it’s known as the Reemployment Tax. Whatever it’s called in your state, it has the same function: to provide income for people displaced from their jobs.