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Businesses Must Stay Alert as State Unemployment Tax Takes Focus

June 6, 2022, 8:45 AM

Leadership at a high-growth tech company comes with many opportunities to learn, expand, and change the status quo. It also provides key insights into budgetary and business trends leaders should prioritize. Regulatory compliance is an ongoing challenge for organizations; it’s also an issue that’s not going away.

This year, one pivotal act in the spotlight is the State Unemployment Tax Act, or SUTA. As unemployment rates increased in 2020, state funds for unemployment insurance did the opposite. Now, replenishing those funds will partially come from higher employer payroll taxes for many states. In a 2020 article that predicted skyrocketing unemployment claims for businesses, Tax Foundation researcher Jared Walczak noted, “It may well be that no state is fully prepared for unemployment compensation claims on this scale, but some states are substantially better prepared than others.”

2020 has come and gone, but now business leaders are enduring a new tax playing field made more challenging by ongoing compliance complexities and state-specific tax regulations. Financial leaders today should be aware of potential pitfalls and streamline their compliance process, especially regarding taxes.

I’m a firm believer in leveraging tech to support your internal processes. Understanding what SUTA is, how it’s calculated, the updated tax rate for your state, and how to optimize your tax process internally is complicated. But it will help you lead your organization through tax seasons to come.

What Is SUTA?

SUTA is a payroll tax required by employers. It’s also known as state unemployment insurance, or SUI. Taxes paid are placed in a state’s unemployment fund to be used by employees who have separated from their employer. Neglecting to pay SUTA or SUI taxes can result in fines, penalty fees, or—in severe cases—criminal charges to the employer.

While the Federal Unemployment Tax, or FUTA, is only paid by the employer, some states require that additional money be withheld from an employee’s wages for state unemployment taxes.

How Is SUTA Calculated?

Leaders should know that several factors are considered when calculating SUTA rates. Those can include the age of your business, the turnover rate for your industry, and the number of former employees who have filed unemployment claims. SUTA taxes are paid to the state where the work takes place. Wage base and tax limits vary by state. Your SUTA rate can change yearly based on state evaluations. Each applicable state will send your company a notice describing how they determine rates.

How Do I Determine an Employee’s Correct SUTA State?

For employees who work in a single state, you’ll pay SUTA taxes to the state where the employee’s services are located. But if your company has employees who work in multiple states, it gets more complicated. To determine the appropriate SUTA state for a multistate employee, it can depend on where the employee’s “base of operations” is located—the state where the employee receives direction or control or possibly an employee’s state of residence. After determining the correct state for each employee, you’ll submit SUTA tax payments to each employee’s applicable state.

Where Can I Find the Updated 2022 SUTA Rate for My State?

As mentioned earlier, tax rates can vary. For example, construction companies can pay a higher SUTA tax rate. Moreover, each state goes about setting up its state unemployment tax account and registering new employers differently. However, elements such as proof of workers’ compensation insurance and an employer identification number are needed for every employer. Without the right partners or systems in place, the process can feel daunting for executives.

Business leaders can find the most updated SUTA rate on their state’s website. There, they can access complete and current SUTA tax rate information, even as updates occur.

A Bit About FUTA Credit Reductions

Another significant tax topic for business leaders today is FUTA credit reductions. As you may know, several states took out loans from the federal government during the pandemic to help pay for unemployment claims and shortfalls in their reserves. Some of those states were “credit reduction states,” or a state that “has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame.”

The result? Potential credit reduction states are now at risk for increased FUTA taxes if they can’t pay back the loans by the US Department of Labor’s Nov. 10, 2022, deadline. States at risk in 2022 include California, Colorado, Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, New York, and Pennsylvania, and the US Virgin Islands.

Streamlining Taxes With Tech

Being a leader, especially in today’s shifting business climate, can be challenging. Federal and state tax regulations are complex and, if not managed properly, can lead to hefty fines and undue stress on your tax, HR, and executive teams. A tool that makes the tax management process simple can streamline filings and ensure businesses remain compliant for their specific state and industry. But not all tech is created equal. If it isn’t intuitive and compliance-driven, it can be more trouble than it’s worth.

In a survey of 800 US C-level executives, conducted by Pollfish on behalf of Paycom in December 2021, 88% of respondents said they think their organization has purchased technology that isn’t fully used by their employees.

A tax process that considers the digital and regulatory landscape should make the employee the point person for interacting with and informing their data—from benefits and taxes to time tracking and payroll. Anything analog or outside the employee purview is at best inefficient and at worst detrimental to your business’s bottom line.

When today’s leaders have a clear understanding of requirements like SUTA and deploy the right tech to help manage their tax processes, they’re prioritizing their internal processes and setting their business up for success long after tax season.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Craig Boelte is chief financial officer of Paycom.

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