When you pay your W-2 employees, you withhold money from their paychecks to cover their Medicare and Social Security taxes. Your company also has to pay an employer share of these taxes according to the Federal Insurance Contributions Act (FICA).
There are two other tax categories that your company pays for entirely: unemployment taxes. In all likelihood, your company has to pay unemployment taxes to both the federal government and your state’s government. The provisions for paying these taxes are based on two distinct but interrelated regulations: the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA).
Read this guide to learn all about FUTA, SUTA, and your obligations for each.
What is the FUTA tax?
The FUTA tax is a tax that companies pay toward federal unemployment insurance. Without FUTA taxes, the federal government would be largely unable to fund its unemployment program, which provides financial assistance to people who have lost their jobs through no fault of their own, meaning they were not fired or quit.
What is the SUTA tax?
The SUTA tax is the state version of the FUTA tax. Just as FUTA taxes fund federal unemployment programs, SUTA taxes fund your state’s unemployment insurance program. As with almost all state regulations, the rules that company owners must follow for SUTA vary by state.
Who has to pay FUTA and SUTA taxes?
Although FUTA and SUTA are different, and each state’s SUTA regulations and tax rates vary, the criteria that determine whether a company must pay FUTA and SUTA taxes are mostly the same. In most cases, if your company meets one of the two below criteria, you must pay FUTA and SUTA taxes:
- Your company paid at least $1,500 in wages to employees during any quarter of the calendar year.
- Your company employed at least one employee on any day of any week for at least 20 weeks, consecutive or nonconsecutive, during the calendar year.
There may be slight variations on these rules by state. Visit your state’s Department of Labor website, or speak with an accountant to know for sure.
What are the federal unemployment tax rates?
Under FUTA, federal unemployment tax rates are six percent taken on each of your employees’ first $7,000 in wages. For example, if you have eight employees and you pay all of them at least $45,000 per year, you only need to pay the FUTA tax rate on $56,000 total – eight employees multiplied by the $7,000 FUTA cap). Six percent of $56,000 is $3,360, an amount significantly less than if you took six percent of the cumulative hundreds of thousands of dollars you pay your employees annually.
Four ways to minimize your unemployment tax burden
While the federal unemployment tax rate is constant, SUTA tax rates and wage caps vary in many ways. For starters, SUTA rates and wage caps differ by state, and perhaps more importantly, many states will vary these rates over the course of the year depending on your business practices. That’s why, if you want to minimize your unemployment tax burden, you may be more successful if you focus on keeping your SUTA taxes low.
That said, there are steps you can take to potentially lessen your FUTA tax burden too. Here are five tips for minimizing both your federal and state unemployment tax obligations.
1. File your taxes on time
As with almost all taxes, you may face a penalty if you file your FUTA taxes late. To stay on track, every time you run payroll and withhold FICA taxes – the Social Security and Medicare taxes with which employers are often more familiar – from your employees’ paychecks, set aside money from your business income to use toward your unemployment tax obligations. You will usually pay your unemployment taxes quarterly, though you may pay them semi-annually if you owe less than $500 in a quarter.
2. Consider using a payroll service
A payroll service will streamline your unemployment tax payments. Payroll software automates all your unemployment tax calculations, and many platforms will even file your tax forms and submit your tax payments on your company’s behalf. Additionally, your payroll software will make sure you submit the right forms to the right agencies. Read more via our SmartBiz Loans blog post: 7 Best Payroll Tools for Small Business.
3. Promptly respond to each unemployment claim
In many states, for every unemployment claim filed by an employee who loses their job with you through no fault of their own, your SUTA tax rate goes up. Promptly respond to each unemployment claim to help stabilize your SUTA rate. If you receive any questionable unemployment claims, prioritize dealing with those to avoid any unnecessary increases to your tax rate.
Speedy responses to unemployment claims can also keep you on track to meet your tax filing deadlines and avoid late fees. That’s because your SUTA tax rate isn’t final until you respond to all unemployment claims, so if you respond to claims too late, you may be unable to know for certain how much to pay for your taxes until close to – or after – your deadline.
4. Avoid terminations and layoffs
If you commit to terminating or laying off fewer employees, your SUTA rates may stay lower since you’ll receive fewer unemployment claims. Plus, employee turnover is inversely related to several markers of good business practice, including employee morale and efficiency.
If you are faced with a downsizing scenario that may seem too cost-saving to turn down, speak with your budget manager about alternatives. Ask your budget manager to come up with a new plan that involves cutting non-employee expenses such as capital and operations instead.
Your budget manager’s new plan won’t just present cost-cutting strategies. It will minimize both a potential increase in your SUTA tax rates and your employee turnover rate. And with less employee turnover comes more motivated employees – and a better company all around.
