Definition: The state unemployment tax act, also called SUTA, imposes a tax on the wages that employers pay to their employees. This tax is used by the state to fund the unemployment insurance programs to benefit fired or laid off employees. This tax is similar to the FUTA tax that the federal government levies on employers.
What Does SUTA Tax Mean?
Each state runs their unemployment program slightly differently and charges slightly different amounts of taxes. For example, some states not only tax the employer, they also require the employee to contribute to the unemployment fund as well.
Most states charge a base rate of 5.4 percent on the first $7,000 of wages paid to each employee. This base rate is then adjusted by the individual employer’s merit rating. This is a rating that most states give employers based on the amount of their employee turnover. A company with higher turnover will have a worse rating requiring them to pay a higher base rate. A company low employee turnover, on the other hand, will be rewarded with a good merit rating and a lower SUTA tax. The concept is to reward employers that keep employees around. With less turn over, the unemployment fund is used less frequently and it costs the system less money.
Let’s take a look at an example.
A manufacturer that employs 25 people who are all paid more than $7,000 per year would pay $9,450 in SUTA taxes (.054 x $7,000 x 25 employees). If this manufacturer had a long-standing history of retaining employees and low rate of employee turnover, it might get a merit rating of 2 percent. This means that instead of paying the 5.4 percent, the company only has to pay a 2 percent tax. Thus, its total state unemployment tax would be $3,500 (.02 x $7,000 x 25 employees).