Tips on How to Keep Your FUTA and SUTA Taxes Low

In almost every State, paying the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) taxes is unavoidable. Businesses in the US have to pay these taxes. However, the good news is that the tax burden is relatively low compared to other payroll taxes and income taxes.

FUTA and SUTA Tax Rates in 2019

In 2018, the FUTA tax rate stood 6% of the first $7,000 paid to each employee annually. SUTA depends on the state. Essentially, SUTA rates range from as low as 0.05% to as high as 14%. This is because wage bases vary by state. Even so, many states impose lower rates for new businesses and higher rates for high-turnover industries like construction. Well-established businesses receive a rate based on experience. Based on the level of turnover and history of unemployment claims from former employees, the “experiencing rating” and resulting SUTA rate will change.

Setting up a SUTA account

You can set up a SUTA tax account once you apply for and receive your Employer Identification Number (EIN). In some states, it is called a state unemployment insurance (SUI) account. Notably, one should set up a SUTA tax account with the state’s unemployment tax agency. The agency then notifies you about your SUTA rate and wage base. In addition, the agency will update you when these change.

The following are some of the best practices to keep your FUTA and SUTA taxes low.

File on Time

Some people pay FUTA or SUTA taxes annually or quarterly. Regardless of the payment period, it is important to pay on time. Failure to pay on time will make the IRS and your state unemployment agency will hit you back with fines. Depending on the degree of lateness, the IRS penalties for late payment of employment taxes range from 2% to 25%. These fines are completely avoidable fees if a taxpayer sticks to deadlines.

Keep Turnover Low

It is imperative to note that both FUTA and SUTA taxes are calculated from a wage base. Currently, the FUTA wage base is $7,000. This means you only have to pay FUTA taxes on the first $7,000 of an employee’s annual wages. Every time you hire someone new, the FUTA wage base will kick into a new amount.

For instance, assume that you have a customer service associate receives a salary of $40,000 per year. An employer would pay only $42 in FUTA if the same person has occupied that role for the last year. If four more people are hired for that role in the last year, then you the employer will have a FUTA tax burden of $168. The hint here is to become a great employer and keep your employee turnover as low as possible. Regardless of whether or not your budget is tight, it is wise to avoid layoffs and try to foster cross-departmental transfers. Use the same strategies to keep your SUTA taxes low.

Respond to Unemployment Claims

As mentioned above, the SUTA tax rate depends on your company’s employment history. In most cases, companies with high turnover and large numbers of unemployment claims will pay higher SUTA taxes. In order to keep these rates down, one should respond to unemployment claims as soon as they are filed.

Often, claims for unemployment insurance are legitimate. Nonetheless, one should always respond if there are any questionable claims. In the US, most states offer employers the opportunity to appeal a claim for unemployment compensation. When anything appears fishy, then one should respond as soon as possible. For instance, if the employee provides the wrong termination date or states the wrong salary, one should be vigilant to respond immediately. Successful blocking fraudulent unemployment claims will help to keep your SUTA rates low.

Try a Payroll Service or PEO

Nowadays, paying FUTA and SUTA taxes is straightforward. It is even easier if all your employees live in the state where your business is located. However, making this payment may get trickier when you have businesses with multiple locations or remote employees. In addition, it may become difficult when you have employees who work in one state while living in another.

In such cases, one can utilize a small business payroll service or a professional employer organization (PEO) can simplify things. Using the services of payroll providers and PEOs will assist in automating your employment taxes. With information about your workforce, they will file the right forms on your behalf and send the correct payments.

PEOs go an additional step further to pool together many small businesses. Then, they act as a co-employee to everyone who works in those businesses. In some states, the experience rating of the PEO is used to calculate SUTA rates rather than the small business. That proves to be very helpful to a business that has experienced a lot of turnovers. Essentially, one gets to take undue credit off the larger size and lower turnover of the PEO. This results in lower SUTA rates.

Get in touch with us for more information about FUTA and SUTA taxes.