As a business owner, you must pay three different types of payroll taxes, as shown below. While FICA may be easy for most businesses, the calculations for unemployment taxes are often misunderstood.

1. FICA (Federal Insurance Contributions Act): Tax used to fund Social Security and Medicare programs
2. FUTA (Federal Unemployment Tax Act): Employers pay this federal tax to provide unemployment benefits to laid-off workers
3. SUTA (State Unemployment Tax Act): Taxes collected by state governments that finance each state’s unemployment insurance fund

Unemployment taxes for businesses

The FUTA calculation. The federal unemployment tax rate is 6% on the first $7,000 of each employee’s income, regardless of where the company does business. In addition, employers who pay their state’s SUTA taxes on time can receive a maximum credit of 5.4%, reducing the FUTA rate to 0.6%. The calculations also exclude certain employee benefits, such as employer contributions to health plans, pensions, and group life insurance premiums.

SUTA taxes are more complicated. Tax rates and taxable thresholds (known as wage bases) vary from state to state, industry to industry, and business to business. For example, the first $54,300 of an employee’s salary in Oregon is taxed under SUTA. However, in Arkansas, that threshold is $7,000. In Oregon, a new employer is taxed at a rate of 2.4%, but more established businesses in that state have rates ranging from 0.9% to 5.4%. Meanwhile, the tax rate in Arkansas can range from 0.1% to 5.0%. Another factor affecting your SUTA tax liability includes the business’s history of on-time payments to the state insurance fund. The number of former employees receiving unemployment benefits can also affect it.

How to reduce your SUTA and FUTA tax bills

• Hire cautiously. If you employ someone who doesn’t work out, you could have additional unemployment claims and a higher SUTA tax rate.
• Train vigorously. To increase productivity and reduce turnover, target your investment in continuing education. Keep employees happy and loyal. Again, high turnover leads to unemployment claims, which leads to more significant SUTA tax bills.
• Terminate judiciously. If you must reduce personnel, consider offering severance or outplacement benefits to terminated employees. The sooner they return to the job market, the fewer unemployment claims are in your company’s SUTA tax calculation.
• Dispute carefully. Take the time to verify the accuracy of unemployment claims, as bogus representations by former workers can drive up your SUTA taxes. If an employee was fired for gross misconduct, thus disqualifying him or her from collecting unemployment, there must be substantial documentation to support the termination.
• Pay regularly. Under federal guidelines, employers who make their SUTA contributions on time can reduce the amount of FUTA taxes by up to 90%.

Remember, you do not need to navigate the complications of filing your business taxes. They can be complex and easily overlooked when you add sales and income taxes. Contact our RRBB advisors if you have any questions or need assistance.