What is SUTA?

While the law that governs this tax is known as SUTA, the tax itself is commonly referred to as state unemployment insurance (SUI) tax, unemployment insurance (UI) tax,  reemployment tax, or employment security tax, depending on the state. Each state sets its own SUI tax rate rules, so SUI taxes vary depending on where workers are located as well as other factors particular to an employer’s business. 

SUI taxes fund unemployment benefits for workers who are unemployed because of no fault of their own, such as layoffs. However, workers who are unemployed due to other reasons, such as "gross misconduct," may not be eligible to receive unemployment benefits, even if their employer has paid SUI taxes.

Why is it important for payroll providers to be aware of this? Because along with other payroll tax regulations—like the Federal Unemployment Tax Act (FUTA) and the Federal Insurance Contributions Act (FICA)—your customers have to comply with SUTA, or they’ll be penalized by the IRS.

But as their payroll provider, you are really the one who is responsible for ensuring that your customers are compliant and that their payroll taxes are calculated properly, including SUI taxes. Any errors caused by your platform can cause a ripple effect on your customers and, by extension, your credibility.

SUTA’s 2024 SUI tax rates

The US Department of Labor publishes the tax rates and taxable wage base information for individual states’ SUI programs every year. For 2024 SUI tax rates, download the table below to reference during audits or to verify your platform’s calculations are correct.

How are SUI taxes calculated?

SUI taxes are calculated by multiplying an employer's SUTA tax rate by the taxable wage base for each employee up to the state's wage base limit. Here's how it works:

Each state sets its own SUI tax rate rules, which can vary widely. Within a given state, specific employers can have different tax rates, too. An employer's SUI tax rate is often based on their "experience rating," which considers factors such as the employer's unemployment claims history and industry turnover rates. If an employer's history of unemployment claims and turnovers is lower, they'll have a higher employer experience rating, and vice versa.

Generally, employers with higher employee turnover and unemployment claims pay higher SUI rates, while those with lower turnover pay lower rates as an incentive. In other words, when an employer's experience rating is high, the state subjects them to a lower SUI tax rate.

Then, there's also the taxable wage base to account for, which is the maximum amount of an employee's wages subject to SUI tax for that year. This wage base differs by state, too.

SUI taxes and multi-state employers

Notably, SUI taxes are paid to the state where the employee works, not necessarily where the company is headquartered. If you’re familiar with multi-state payroll taxes, you already know this compounds the challenges associated with accurate tax calculations and ensuring compliance with state and local regulations. 

Here’s how: Say one of your customers employs workers in just one state. In that case, your state unemployment insurance calculations need to adhere to that state's SUI tax regulations. However, if they have employees in multiple states, you need to help them navigate SUI tax calculations and filings for each state where their employees are based. This type of scenario gets even more complex with remote work in the mix, where an employee works in more than one state for the company for extended periods.

To make things easier, some states, like Texas and New York, offer resources to help employers and their payroll providers figure out which states’ tax rate and wage bases are applicable for workers. Or, you could rely on a payroll tax compliance API like Symmetry Payroll Point to determine what SUTA rates apply to individual workers.

Example of a SUTA tax rate 

Take, for instance, California, where the tax in question is known as UI tax. Employers subject to UI tax pay a percentage on the first $7,000 in wages paid to each employee within a calendar year. The rate schedule and the amount of taxable wages are set annually, and new employers are typically charged a rate of 3.4 percent for the first two to three years. 

Each December, employers receive notification of their new rate. Considering the maximum UI tax rate of 6.2 percent, the highest possible tax per employee per year is $434 (6.2% of $7,000).

SUTA tax exemptions

SUTA also dictates exemptions and credits to SUI taxes, and these exemptions and credits vary from state to state. Entities that are exempt include social welfare organizations, employee benefit associations or funds, labor and agricultural organizations, business leagues, social clubs, fraternal societies, veterans' and political organizations, and others—assuming the organization meets the requirements. 

In most states, 501(c)(3) nonprofit organizations and religious organizations are exempt from paying SUTA taxes (though there are exceptions). Instead, they may reimburse the state for unemployment claims as they come up. In California, for instance, government entities and certain nonprofit employers have the option to use the reimbursable method for financing UI. So, these organizations reimburse the UI fund directly for the full amount of benefits their former employees receive.

Some states exempt very small businesses with only a handful of employees or those paying wages below a certain threshold from SUI taxes. For example, Utah exempts employers from SUI taxes for domestic workers if they pay less than $1,000 in wages in a calendar quarter. 

If an organization qualifies, it must complete an application to be recognized for an exemption and submit it to the state.

SUTA tax credits

There are also credits that affect the SUI taxes an employer is required to pay. As we’ve covered, states often offer lower rates to employers who have a strong "experience rating," indicating that fewer of their former employees have filed for unemployment benefits over time.

Then there's the FUTA tax credit. Employers who pay their SUI axes promptly and in full can claim a credit of up to 5.4% against the standard 6% FUTA (Federal Unemployment Tax Act) rate. This can effectively reduce the FUTA rate to just 0.6%.

Additionally, some states offer tax incentives to encourage business activities, like hiring specific groups of workers or setting up operations in certain areas. These incentives can significantly reduce an employer’s overall state unemployment tax burden. 

As their payroll provider, it's up to you to help your employer customers  calculate and file accurate unemployment tax and wage reports so that they don’t have to worry about the burden of compliance.

What is SUTA dumping?

SUTA dumping is a major problem for the SUI system. Simply put, it's a tax evasion tactic where shell companies are created solely to secure lower SUI tax rates. Once these low rates are secured, payroll from a company with a higher UI tax rate is transferred to the company with the lower rate. The company with the higher rate is then abandoned, or "dumped."

This practice is also known as state unemployment tax avoidance or tax rate manipulation, and it's illegal.

The SUTA Dumping Prevention Act of 2004 requires states to implement laws preventing employers from unfairly lowering their SUI contribution rates. This law not only outlaws SUTA dumping but also imposes penalties on those who engage in or promote tax evasion.

California was among the first states to respond to the federal SUTA Dumping Prevention Act by passing legislation, specifically AB664. This legislation:

• Penalizes employers who illegally lower their SUI rates, requiring them to pay the highest applicable rate plus an additional 2%.
• Imposes a penalty of either $5,000 or 10% of the underreported contributions, whichever is greater, on anyone advising on violations of California's UI rate and reporting rules.
• Specifies that if employers under common control transfer a business, the reserve account will also transfer, unless the transfer aims to secure a lower SUI rate, in which case it will be denied.

The harsh reality is that SUTA dumping schemes significantly add to the challenge of US states unemployment funds being severely underfunded. In fact, in 2022, just 16 states had reached the US Department of Labor’s recommended minimum financing standard for the SUI trust funds that are used to pay unemployment benefits. When these programs are underfunded, it puts many states in a tough position where they need to borrow from the federal government, and that quickly turns into a vicious cycle.

Who’s responsible for SUI tax?

We briefly covered this earlier, but we’ll reiterate. In most cases, employers are held responsible by the state for SUI taxes. But there are some exceptions. In three states—Alaska, New Jersey, and Pennsylvania—employees' wages are directly taxed to support SUI benefits. These are the only states that require employees to contribute to the SUI fund.

In reality, if employers outsource their payroll tax calculations to your platform, it falls on you to ensure these are done correctly. But that’s easier said than done.

Payroll tax compliance is one of the biggest challenges faced by payroll providers and employers. While it's hard enough to get payroll taxes right at the federal level, things become more complicated at the state or local level. Each state sets its own SUI tax rate rules and taxable wage base, and these are usually updated annually. It’s just a lot to keep up with, but Symmetry can help.

Simplify SUI taxes for your customers with Symmetry

If you already work with Symmetry to build your payroll platform or product, you know that our products are the gold standard for multi-state payroll tax calculations, including Social Security, medicare, FUTA, and SUI taxes, and more. The Symmetry Tax Engine uses proprietary geocoding technology to calculate payroll taxes to rooftop-level precision based on employees’ work and home addresses, so you can rest easy knowing your customers’ payroll taxes are calculated in accordance with the most up-to-date rules and regulations.

Industry-leading payroll providers like Deel, Gusto, ADP, and Wave, turn to Symmetry to provide a compliance infrastructure for their platform. We track all the payroll tax changes across thousands of US jurisdictions and automate payroll tax calculations, so you can focus on innovating your product and expanding your customer base.

If you’d like to work with us to simplify payroll taxes, including SUTA, for you and your customers, feel free to reach out to us directly with your questions and we’d be happy to help!