For small business owners, taxes can be a challenge. Even the basics, such as understanding what forms you need to submit and when to submit them, are often tricky. One common mistake business owners make is not fully understanding the difference between special unemployment tax and federal unemployment tax.
If you’re unaware of the complexities between these two taxes, we don’t blame you. It’s confusing! To help you out, we’re breaking down what you need to know about the State Unemployment Tax Act (SUTA) vs. the Federal Unemployment Tax Act (FUTA) taxes and how they differ.
What Are SUTA Taxes?
SUTA is a tax that employers pay to fund unemployment benefits. It's a state-level tax that is collected by the state government. Employers are required to pay SUTA on all employees who work in the state where they're based. The amount you'll owe depends on how many employees you have and what their salaries are. There are minimum and maximum amounts that you can be taxed for each employee, which can be found on your annual report from your state's Department of Labor.
SUTA taxes can vary depending on your state and how much you pay into the system. In most states, employees pay a specific percentage of their wages to fund unemployment benefits. For example, if you’re an employee making $1,000 per week and your state's unemployment rate is five percent, then $50 of your wages will be used to fund unemployment benefits. Ultimately, this means that if an employee quits or gets laid off, they'll receive $50 per week in benefits from the government, which is pulled from the SUTA tax pool. This lasts until they find another job or until their benefits run out (which could be up to 26 weeks).
Understanding FUTA Taxes
FUTA is a tax that you pay on your employees' wages if you have more than one employee and they earn at least $1,500 in a year. Essentially, it’s another way you pay your employees, but it goes into a fund that employers pay directly to the federal government. FUTA is based on the wages you pay your employees. Ultimately, it’s a fund that helps people find new jobs who are out of work because their company closed, or they were laid off (or be eligible for unemployment benefits). It also helps cover various administrative costs associated with unemployment claims.
The FUTA tax rate is six percent of the first $7,000 in wages paid to each employee per year. You pay half of this tax (3.5%, or $42), and your employees pay the other half through their payroll withholdings (2.5%, or $30).
If you're an employer with only one or two employees and they earn under $7,000 total, then you don't have to pay FUTA taxes because there aren't any wages to report or withhold for them. However, if your company grows and hires new employees with total wages over $7,000, you must start paying FUTA taxes.
How Is SUTA Different From FUTA?
FUTA taxes and SUTA taxes are similar, which often leads to confusion. Both are payroll taxes that help fund unemployment insurance and are taken on by employers. Both FUTA and SUTA taxes are part of the Federal Insurance Contributions Act (FICA), which is why they share nearly identical names.
However, there are some key differences that ultimately separate them. For starters, FUTA is for federal unemployment insurance, while SUTA is for state unemployment insurance. If your company does business in multiple states and you have employees who live in different states, then you'll have to pay both FUTA and SUTA taxes. This can get complicated if you don't know how to calculate which amount should be paid where!
In practice, the biggest difference between FUTA and SUTA is that FUTA covers all types of income: wages, tips, commissions, bonuses—anything that falls under the umbrella term "wages.” In contrast, only wages paid by a company fall under SUTA. Both SUTA and FUTA taxes are paid out of a company's gross wages—that means before any deductions or withholdings are taken out. The amount paid depends on how many employees you have, how much they earn, and how long they've been unemployed.
How Do I Pay These Taxes?
The method companies use to pay SUTA and/or FUTA taxes depends on whether their business is incorporated or not. If you're a sole proprietor, then you'll pay the taxes yourself. If you're an LLC or corporation, then you'll pay them through the corporation's payroll account.
To pay these taxes, you'll need to file an 'Employer's Quarterly Contribution Report' on Form 940. This report is due 20 days after the end of each quarter (at the end of January, April, June, and September). You can find more information about filing this report on the IRS website or on your state’s official website.
How Do I Pay Less SUTA And FUTA Taxes?
You can lower your SUTA and FUTA taxes by analyzing gaps in the amount of work you have available vs. the number of hours your employees are available to work. Here are some ways to do that while paying a fair wage:
- Make sure that all your employees are covered by workers' compensation insurance (if they should be). If they aren't, you'll need to pay the premiums for them yourself.
- If you're paying an independent contractor instead of an employee, consider hiring an independent contractor who has other jobs. This will prevent them from being able to claim unemployment benefits while they work for you or vice versa.
- Try to keep the amount of work available consistent with the number of people you employ so you aren’t left with a surplus of employees with no work to do.
The choice between SUTA and FUTA will depend on which system you are eligible to pay into. From there, it’s only a matter of the amount you are or aren't making this year. Most employers are only required to pay SUTA, but to be absolutely sure of your obligation as a company, consult a professional.
Assistance For SUTA And FUTA Taxes
Luckily, GMS has a well-qualified team with years of experience helping businesses navigate the complicated world of payroll tax laws. We know how to help you calculate your SUTA and FUTA taxes so that you don't have to worry about it—you can finally get back to running your business. Contact us today!