Understanding SUI Tax (State Unemployment Insurance Tax)

Understanding SUI Tax (State Unemployment Insurance Tax)

Deskera Content Team
Deskera Content Team
Table of Contents
Table of Contents

The SUI, or State Unemployment Insurance, is a way or strategy for the State to battle unemployment and poverty. By the means of an employer-funded (through taxation on paychecks) kitty, the State disburses temporary financial support to those employees or workers who have lost their jobs because of uncontrollable reasons.

The unemployed can apply for a State Unemployment Insurance; based on the conditions of their removal from the job, the State approves or rejects their application.

With the havoc that the COVID-19 pandemic wreaked, the world suffered one of the highest unemployment rates ever since the last record. In order to ensure business continuity, businesses began the process of layoffs, leaving countless of the workforce unemployed, as new employment was also rare to come by because of movement restrictions.

Consequently, the SUI experienced a massive surge in claims received. States (not all) did begin initiatives to reel in the SUI costs from snowballing because of the pandemic by removing the non-pandemic related charges from the SUI tax that employers are liable to pay.

Speaking of SUI tax, a lot more needs to be understood:

  • Understanding the SUI Tax
  • Who Pays The SUI Tax?
  • Calculating SUI Tax
  • Factors That Impact SUI Tax
  • Keeping SUI Tax Rates Low
  • Impact of COVID-19 on SUI Tax

Understanding The SUI Tax

SUI stands for State Unemployment Insurance. As a way of assisting the unemployed and reducing poverty, the State imposes a tax on the employers that is directed towards creating the fund for SUI. This tax is known as SUI tax.

SUI can be claimed by the unemployed under conditions that don’t hold them accountable for the loss of their jobs:

  • Medical conditions or illnesses that deem them unfit to work
  • Layoffs
  • Being removed from a position due to some reason other than misconduct on the job
  • Other causes, such as compelling personal reasons that keep the individual away from work

The SUI tax is employer-funded, and is typically based on two major factors:

  • State-dependent base rate (or wage base for that calendar year)
  • The number of SUI claims filed at your business by ex-employees

The wage base is defined as the maximum amount of earnings eligible for taxation for a particular calendar year.

SUI Tax Aliases

In fact, SUI Tax goes around with quite a few names. The SUI tax is specific to each State, with its own tax rates and setup (SUI taxes can differ from State to State in a range of 0% to as high as over 12%) – and sometimes different States have their own names for this tax.

A few States refer to SUI Tax as SUTA or State Unemployment Tax Act. A few other monikers this tax carries in other places are Unemployment Benefits Tax (UBT) and Reemployment Tax. The names may be different, but all of them refer to the same exact tax.

Difference Between SUTA and FUTA

The SUI tax is levied on two levels: State and Federal. Like the State Unemployment Insurance Tax (SUI Tax) is levied on employers by the State, there FUTA (FUTA stands for Federal Unemployment Tax Act) is imposed on employers at the Federal level.

While both the funds are supposed to be utilized towards SUI tax claims filed by the unemployed, the FUTA is mostly used to cover the costs of running this program. This doesn’t mean that FUTA funds can’t be deployed to cover claim costs, though.

This begs the question: are payroll organizations required to pay both – SUI tax and FUTA? Typically, yes. If you have employees on your salary, you are required to pay both the taxes; however, there are some exemptions to this:

  • Specified entities of the government
  • Charitable, educational and religious organizations
  • Non-profit organizations/institutions

Who Pays SUI Tax?

All employers who roll out salaries to engaged workers are required to pay both – State and Federal unemployment benefits taxes. The tax rate imposed on the employer typically doesn’t impact the salary payout of the employee; this may differ from one State to another.

SUI tax rates depend on the number of former employees of an organization filing for unemployment benefits. There is a directly proportionate relation between SUI taxes and the number of claims filed: the higher the number of claims, the higher the tax rates. This does cause organizations to take measures to control the SUI tax expenses by managing employee turnover.

Under certain specified circumstances, your organization may be exempt from paying the SUI tax.

Who Benefits From SUI?

State Unemployment Insurance and Federal Unemployment Tax Act are a boon for those who lose their jobs for no fault of their own. The financial support extended to these individuals, even though it is short-term, helps them keep things together until they find new employment.

In order to be eligible for SUI benefits, an individual must meet all of the following conditions:

  • Unemployed, but because of no fault of self (illness, layoffs, etc.)
  • Should have worked at the same organization for a minimum period as specified by the State
  • Earned the minimum wages stipulated by the State
  • Actively engaged in searching for new employment as they collect unemployment benefit paychecks every week

Each state has its own laws on SUI taxes and benefits, so they may differ everywhere.

Calculating SUI Tax Rates

Calculating the SUI tax rate applicable to your organization depends on the wage base stipulated by your State. The formula is simple: to arrive at the SUI tax rate, you multiply the wage base with the SUI tax that the State has specified for the employers in your region.

For example, in the State of Colorado, the wage base as of 2021 is $13,600. Thus, if yours is an organization operating in Colorado, you are only required to pay SUI tax on the first $13,600 of the wages of every employee in your organization.

There are certain exceptions to this, though. In some States, the SUI tax is imposed on the employees, much like Medicare and Social Security expenses. In order to understand the complete picture of SUI taxes in your State, you will need to check with the Department of Labor.

Factors That Impact SUI Tax

SUI tax, as discussed earlier, is directly proportionate to the number of SUI claims filed on your organization. That being so, one big factor that impacts your SUI tax is the reason you lay your employees off. In case of poor performance at work, letting an employee go will typically get your company slapped with an SUI claim. The more such instances happen, the higher your SUI tax would be.

Another factor that impacts SUI tax is the region you conduct your operations in. States like Alaska, New Jersey, and Pennsylvania, for example, do not need employers to shoulder the SUI tax and levy it on the worker wages instead.

Some of the other important factors that you can keep track of to evaluate and forecast your SUI tax rates are as follows.

Total Unemployment Rate

The economic condition of the State your business operates in determines how high or low the rate of SUI tax is likely to be. A higher unemployment rate translates into higher SUI tax rates overall.

Solvency of State Funds

The ability of a State to shoulder the SUI claims filed depends on the solvency of SUI funds. It can give you an idea of the State’s financial adequacy to handle unemployment recovery; however, the SUI tax rates are unlikely to be impacted by this metric.

Initial Unemployment Claims

The number of new claims filed under SUI has a direct underlying impact on SUI tax rates. During the Great Recession, a great number of first claims were filed, and trends recorded a subsequent increase in SUI taxes.

SUI taxes, since they are meant for the benefit of the unemployed, have a direct correlation with the unemployment metrics of a State. Employers are required to contribute to the State as accountable components of the society in reeling in unemployment, which results in SUI taxes being impacted by the jobless demographics of a State.

Tips to Keep Your SUI Tax Rates in Control

The SUI rates at your organization are a direct result of the number of SUI claims being filed by your ex-employees. Most businesses operate under the misconception that dealing with an unemployment claim is simple; however, in more cases than not, an organization almost always loses to the claimant. Unless your organization fires an employee for misconduct and can prove with tangible evidence that there was misconduct on the part of that individual, AND the employee was aware that they could lose their job over it, your case is weaker than the claimant.

Only and solely in the case of evidenced, provable, and communicated misconduct can your organization reject a claim. The labels of “Performance not at par” or “Absenteeism” or “Incompetence” are not qualified reasons to fire an employee and step away from claims settlement.

Things being so, it would seem that the SUI rate isn’t something easily controlled. Truth is that there are certain practices you can adopt at your organization that can help you put a brake on rising SUI rates.

Before Termination

Some best practices to evidence employee behavior, establish a trail of proof and official communications regarding misconduct are as follows.

  • To ensure that the misbehaving employee is aware of the situational reality, it is best to communicate on official letterhead to the concerned individual that their behavior may result in job termination. Although no law mandates this before you hand out the pink slip, it creates a documented warning record that could save you from the claim
  • Adopt an employee handbook containing workplace demeanor/behavior policies that bring the employees up to speed with the consequences of non-compliance, and seek their signatures and acknowledgment in forms that can be documented
  • Pay attention to complaints that come in regarding workplace concerns that your employees may be facing. Ignored complaints often lead to the filing of SUI claims based on “Good Cause” – which is often the result of ignorant administration

After Termination

Ensuring timely obedience to protocol helps you build a strong case.

  • If your organization has received a notice to furnish pertaining documents to an SUI claim the unemployment division has received, it is best to submit all the required documentation within the timeline requested. Failing to do so will classify your organization as an “Uninterested Party” and automatically entitle the claimant for approval and benefits
  • Strengthen your case by also including documents that you collected before termination: the employee policy handbook, the writ communications informing the claimant their job was at risk, the arbitrations, and everything in between

Assuming the worst, build your workplace practices such that all your tracks remain covered, and you can protect your SUI rate from unjustified claims. However, creating a very binding, stringent work environment can also result in turnover; finding the right balance.

The Long and Short of SUI Tax

Employment opportunity for individuals is a prerequisite for economic betterment. More than that, it is important to give the recently unemployed a second chance to get back on their feet, without denting the economic fabric of the country. SUI tax is an attempt at this very objective. With contributions from the employers (and in some cases, the workforce), the State runs the SUI program, aiding the jobless build a life for themselves, and helping them support themselves as they search for new opportunities.

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Key Takeaways

Summing up, SUI tax involves the following highlights:

  • SUIs (State Unemployment Insurances) are employer-funded corpora that the State runs in order to help the nation's jobless population get back on their feet. With filing an SUI claim, an unemployed individual, provided that he meets certain criteria, is eligible for financial support by the State for a fixed term, or until they find new employment
  • SUI taxes are levied by the State; however, there is also the FUTA (Federal Unemployment Tax Act) that is imposed at the Federal level. Typically, an employer must pay both. There are certain instances where organizations are exempt from these taxes (such as charitable organizations). Each state has its own SUI tax. States like Alaska, New Jersey, and Pennsylvania don't require employers to pay this tax
  • Individuals are entitled to SUI claims in case they were laid off for reasons other than misconduct. Organizations can adopt preventive practices, such as communication, employee handbook, and termination warning to protect themselves from unjustified SUI claims

For more information on SUI tax in your area, check with the Department of Labor.

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