It’s probably fair to say that most entrepreneurs didn’t give much thought to the complexities around payroll management and taxes before starting a business and hiring employees. The fact of the matter is that business owners have a variety of tax obligations, and there are likely acronyms like SUTA (State Unemployment Tax Act) and FUTA (Federal Unemployment Tax Act) you’ve never heard of before that you need to know as they relate to managing your business. If you’re an employee, you don’t have to worry about these since they are the full responsibility of your employer, and you won’t even see any reference to them on your pay stub.
What is SUTA?
SUTA (State Unemployment Tax Act) is a payroll tax paid by all employers at the state level. These taxes are put into the state unemployment fund and used by employees that lose their job through no fault of their own causing them to file for unemployment and collect their benefits.
SUTA was created in tandem with FUTA during the Great Depression in the 1939 when unemployment was rampant and widespread, and it was used to help support the unemployed American workers and keep the economy going, and we have continued with them ever since then.
FUTA (Federal Unemployment Tax Act) is also a payroll tax that employers are responsible for paying, however, this tax is to help fund the federal government’s oversight of the unemployment insurance programs for each of the individual states.
Those that run payroll for a business are responsible for making sure the business properly calculates these taxes and pays it on time. Typically, the SUTA tax must be paid to the state in quarterly installments. Every state requires its employers to pay this tax, and no employee has money withheld from his or her check to pay SUTA. It’s entirely funded by employers.
How is SUTA calculated?
SUTA taxes vary by state and even vary to some degree by business within each state. The two main factors that determine how SUTA is calculated are the taxable wage base of the business and the tax rate.
Taxable wage base
A taxable wage base is the maximum amount of employee income that is subject to the SUTA tax. This base amount is determined by each state. For example, in Texas, the taxable wage base is $9,000 per employee for all employers in the state. Each state has a different taxable wage base ranging from $7,000 in Arizona up to $52,700 in Washington.
Each state sets a range of minimum and maximum tax rates for SUTA taxes. Staying with the Texas example, the min/max tax rate for 2020 ranged from 0.31% to 6.31%. New businesses in Texas start with a SUTA tax rate of 2.7%.
For pre-existing businesses, the states determine what your tax rate will be within the min/max range each year. They will assess your business and score it based on the number of former employees that filed for unemployment benefits the previous year. Businesses with high employee turnover will typically be assigned a higher SUTA tax rate.
SUTA tax calculation example
Let’s calculate the SUTA expense for a new business in Texas with 10 employees:
(10 employees x $9,000 taxable wage base) x 2.7% = $2,430
This would be your SUTA tax calculation for the year, and you would divide this up into 4 quarterly payments of $607.50.
Unemployment claims in 2020 skyrocketed due to Covid-19
Because of Covid-19, there were an unprecedented number of state unemployment insurance claims over the last year. According to the U.S. Department of Labor, during the 43 weeks ending January 9, 2021, there were nearly 75 million unemployment claims filed. Compare that to the recession of 2008 where there were just over 37 million unemployment claims filed.
From a pandemic perspective, we are beginning to see light at the end of the tunnel with vaccines rolling out across the country, but until we get to the point where businesses open back up and things get back to something much closer to what we would consider normal, Covid-19 will likely continue to play a role in the number of state unemployment insurance claims as we begin 2021, and it will continue to put stress on the state unemployment insurance (SUI) system as a whole.
SUTA rate increases in 2021
With so many unemployment insurance claims last year in 2020, state unemployment trust funds have been significantly depleted in an alarmingly shortly amount of time. According to Equifax, net state trust fund balances were negative $20.66B at the end of Q4 2020.
State unemployment fund balances play a significant role in determining SUTA rates. As state unemployment funds are depleted, SUTA tax rates increase, and that means employers are going to have to pay more SUTA taxes in 2021 to help get the unemployment funds replenished.
The problem is many of these employers are still struggling financially and trying to survive and weather the pandemic storm, and now they are beginning to receive notices advising them of rate increases to their state unemployment tax rates for 2021.
Though there are a variety of appeals being brought to state authorities regarding the SUTA tax rate increases, it doesn’t look like that will change anything at least for the time being. As a PEO provider ourselves, we are also working with our representatives in all states to appeal to state authorities to find a solution that will reduce the impact on businesses that are already struggling in these difficult times.
Managing payroll is complicated, but it doesn’t have to be
Even though you don’t have control over SUTA tax rates, you do have control over how you can handle the many complexities of managing payroll. The reality is there are a lot of complex moving parts to managing payroll accurately and effectively, and there is really isn’t room for error.
Unless you have specialized expertise and experience with managing payroll, it can be really time consuming and frustrating, not to mention it can get you into legal hot water if don’t do it accurately and in accordance with all the appropriate laws and regulations, and the fines & penalties can be catastrophic.
Most business owners just don’t have this expertise and can’t afford to bring onboard a full-time payroll expert, and if that happens to describe your situation, you may want to consider an outsourced payroll service.
The advantage of an outsourced payroll service is you can have experts fully manage your payroll, removing all the administrative headaches and freeing your time up so you can focus on growing your business. If you take this route, look for a service that also has knowledge and expertise in your particular industry. This is especially important for highly regulated and complex industries like Restuarant & Hospitality, with industry-specific wage and labor laws that are constantly evolving and changing.
Check out Fourth’s Outsourced HR & Payroll Services for more information and see how Fourth can easily and affordably manage the complexities and administrative overload for you so you can focus on doing what you love – growing your business.
Effective human resources administration is table-stakes for keeping your employees happy and engaged.
On top of the decreased sales resulting from the pandemic, the hospitality industry is facing an ongoing rise in labor costs and uncertainty regarding supply chain reliability and product availability.
Human resource administration is a fundamental responsibility of any successful business, but it can create its fair share of headaches, especially for small business owners.
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