What Is SUTA Tax? Understanding How State Unemployment Tax Works

State Unemployment Tax Act (SUTA) is a state payroll tax that funds unemployment benefits for workers who lose jobs through no fault of their own. Understanding how it works, what rates apply, and compliance requirements helps you budget accurately and avoid penalties.

What Is SUTA?

SUTA (State Unemployment Tax Act) is a state payroll tax employers pay to fund unemployment benefits for workers who lose jobs through no fault of their own. Each state sets its own rates, wage base limits, and rules. Some states call it State Unemployment Insurance (SUI), reemployment tax, or unemployment benefit tax but the purpose is the same — providing temporary financial assistance to eligible unemployed workers.

What Is the Difference Between FUTA and SUTA?

SUTA refers to the taxes paid at the state level, but there's also a federal equivalent. The Federal Unemployment Tax Act (FUTA) requires employers to pay federal unemployment taxes that fund the administrative costs of state unemployment programs and provide extended benefits during periods of high unemployment.

The key differences between these two taxes include who receives the payment and how rates are set. SUTA payments go to your state government at rates that vary by state and employer, while FUTA payments go to the federal government at a standard rate of 6% on the first $7,000 of each employee's annual wages. However, employers who pay their SUTA taxes on time can receive a federal tax credit of up to 5.4%, effectively reducing their FUTA rate to 0.6%.

Who Pays SUTA?

SUTA is primarily an employer-paid tax, but rules vary by state. Here’s what you need to know:

• Most states: Employers pay SUTA; no employee deductions.
• Exceptions: Alaska, New Jersey, and Pennsylvania require both employer and employee contributions.
• Rate factors:
  • State-assigned tax rate and wage base (varies by state).
  • Employer experience rating (based on unemployment claims).
  • Industry type (high-turnover industries often pay more).
• New employers: Assigned a standard rate until enough history is built.
• Exemptions: Some nonprofits, religious institutions, and government entities may reimburse claims instead of paying SUTA.
• Multi-state employers: Must comply with each state’s rates, wage bases, and filing rules.

How To Calculate SUTA

Calculating your SUTA tax requires knowing two pieces of information: your state-assigned tax rate and your state's wage base limit. The basic formula is:

SUTA Tax = Tax Rate × Wages (up to wage base limit)

For example, if your state has a wage base of $10,000 and assigns your business a SUTA rate of 2.5%:

• Employee earning $15,000: $10,000 × 0.025 = $250 in SUTA tax
• Employee earning $8,000: $8,000 × 0.025 = $200 in SUTA tax

Key points to keep in mind:

• Tax applies only up to the wage base; earnings beyond that are excluded
• Wage bases vary by state ($7,000–$50,000+)
• Rates change based on experience rating and claims history
• Most employers file quarterly; states offer online filing options

The Business Impact of SUTA: Why It's Important and What You Can Do

Understanding SUTA's role in your business operations helps you plan more effectively and avoid potential problems. This tax affects multiple aspects of running your company, from compliance obligations to long-term cost management and control.

Why Should Businesses Care?

SUTA impacts compliance, costs, and operations. Key reasons to pay attention:

• Compliance: Missing payments or deadlines can lead to penalties, interest, and legal issues.
• Budgeting: Tax rates affect payroll costs and can change annually based on claims history.
• Experience Rating: Fewer layoffs mean lower rates; contest improper claims to protect your rating.
• Multi-State Complexity: Different rates, wage bases, and deadlines increase administrative burden. Business compliance resources can help you stay informed about changing requirements across federal and state regulations.

Quick Tips for Employers

Stay compliant and manage costs with these steps:

• Register with your state unemployment agency when hiring your first employee.
• Keep accurate payroll records, including wages and termination details.
• Monitor your experience rating and contest invalid claims.
• Stay updated on state-specific rules, especially if operating in multiple states.

How Paychex Can Help

Managing SUTA across states is complex — Paychex makes it simple:

• Automated Calculations: Our SUI service integrates with payroll to apply correct rates and wage bases.
• Paychex Flex® Platform: Handles quarterly filings and updates automatically when state rules change.
• Benefit Charge Audits: Verify charges, confirm eligibility, and dispute errors.
• Multi-State Support: Tracks varying rates, deadlines, and requirements; specialists assist with claims and compliance.

With 50+ years of experience, Paychex helps you stay compliant and focus on growth. Talk to a Paychex specialist today.