Unemployment Tax Management

There are 3 different types of payroll tax that business owners are required to pay. Some of the tax calculations are easy to misunderstand. The 3 types are:

1. Federal Insurance Contributions Act (FICA). This tax is for funding the 2 things, Medicare and Social Security programs. To calculate the amount you’ll pay for FICA taxes, multiplying your salary by 7.65%. There may be exceptions or limits that might apply to your situation.
   
   
2. Federal Unemployment Tax Act (FUTA). This federal tax is paid by employers to provide laid-off workers unemployment benefits. No matter where your company does business, on the first $7,000, the federal unemployment tax rate is 6%. Also, if an employer pays their state’s SUTA taxes on time, the company may be eligible to receive a maximum credit of 5.4%, which will reduce the FUTA rate to 0.6%. Certain employee benefits are also excluded from the calculation such as pensions, group life insurance premiums, and employer contributions to health plans.
   
   
3. State Unemployment Tax Act (SUTA). This tax is to finance each state’s unemployment insurance fund and is collected by State governments. The SUTA taxes are a bit more complicated. The tax rates and thresholds (wage bases) vary from business to business, industry to industry, and state to state. For example: in Arkansas, the first is $10,000 of an employee’s salary would be taxed. In Oregon, the first $43,000. Also in Oregon, for a new employer, the tax rate would be 2.6%, though for an established business the rate may range from 1.2% to 5.4%. Other factors that may affect this tax liability are the number of former employees that received unemployment benefits and the business’ history of paying on time to their state insurance fund.
   
   

Reducing tax bills for FUTA and SUTA

• • • Use caution when hiring. You may end up with more unemployment claims and a higher SUTA tax rate if your employees don’t work out.
      
      
    • Actively train employees. By targeting your investment (employees) with continued training you’re likely to increase productivity and reduce turnover. A happy employee is a loyal employee. A high turnover rate could mean more unemployment claims and a higher SUTA tax bill.
      
      
    • Terminate rationally. If reducing your employees is a must, you might consider offering outplacement or severance benefits. Why? Because the sooner this employee returns to the job market, the fewer unemployment claims to be factored into the SUTA tax calculation for your business.
      
      
    • Carefully dispute. Verify the accuracy of any unemployment claims so you don’t increase your SUTA tax unnecessarily. For example, An employee that was fired for misconduct would be disqualified from collecting unemployment benefits. You should have strong documentation to support the termination of your employees.
      
      
    • Regular SUTA payments. Employers that make the business SUTA payments on time may reduce the amount of the FUTA taxes by up to 90%.
      

At Summit CPA we offer multiple resources to assist and help your business grow. If you’re ready to get an edge on your competitors? Contact our office at (866) 497-9761to schedule an appointment with our advisors.