Glossary of Human Resources Management and Employee Benefit Terms
State unemployment insurance (SUI) is a tax-funded program by employers to give short-term benefits to workers who have lost their job. This tax is required by state and federal law. Unemployed workers receive these benefits on the condition that they’re looking for a new job. The benefits are meant to subsidize the unemployed worker’s basic needs until they find a new job.
Is SUI a Payroll Tax?
Yes, state unemployment insurance is part of what makes up payroll taxes. The specific SUI tax rate varies depending on a state’s requirements. For more information on specific state tax rates, visit your state’s workforce agency website.
Employers are responsible for state unemployment insurance tax for their own employees. The amount of SUI the company pays depends on the SUI rates they’re eligible for. Almost all companies are required by law to pay this tax, but there are some rare exemptions.
Most employees do not have to pay SUI, except in Alaska, New Jersey, and Pennsylvania.
Anyone who quits or is fired for misconduct is not eligible for these benefits, but other workers can be eligible if their situation aligns with the stipulations of state unemployment insurance. For example, someone who is laid off from their job or who leaves their job because of health problems could be eligible for SUI.
Employers are not required to pay state unemployment insurance tax on wages for an employee who is under the age of 21. Otherwise, almost all companies must pay SUI taxes in any state where the company has employees.
However, some companies are exempt from paying SUI, such as charitable organizations. A charitable organization must generally be a 501(c)(3) to be exempt from the tax, but laws vary by state. 501(c)(3) organizations are also exempt from Federal Unemployment Tax Act (FUTA) tax under federal law.
Unemployment insurance is funded at the federal and state level. Federal contributions to the fund are paid according to FUTA.
Under FUTA, a company must pay unemployment tax on the first 7,000 dollars an employee earns while working at their company. After an employee earns more than 7,000 dollars, the company is no longer required to pay the FUTA tax.
FUTA tax rates vary by year, but the tax for 2020 stands at 6 percent. This rate is reduced for most companies to 0.6 percent because of credits earned for paying SUI.
Companies must also pay unemployment tax according to their state requirements. State requirements are dictated by the state government and rates vary depending on location. Most SUI tax rates are 0 to 11 percent.
State unemployment insurance tax rates vary by state. You can find these rates on your state’s workforce agency website. When contacting your local workforce agency, ask for the Employment Security Tax Section to get specific answers about SUI rates within the state.
State unemployment insurance tax rates vary by state. Each state sets a rate based on:
Wage base for that state
Number of former employees who have filed for unemployment benefits
The wage base is the maximum amount of taxable earnings in a calendar year. Each state has a different wage base that may change depending on the year. Your business’s SUI tax rate may increase if more of your former employees have filed for unemployment.
Newer companies get a “new employer rate” for SUI. This rate will change each year, depending on how many employees file a claim. Most new employer rates are 2 to 4 percent.
Both FUTA and SUI taxes are tax-deductible for employers. Most of these taxes can be entered on line 23 of the Schedule C form when filling out annual tax return forms.
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