Calculating Federal and State Unemployment Taxes

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As of March 2018, the unemployment rate in the United States was just a fraction above four percent; the last time this macroeconomic indicator recorded such low levels was before the 9/11 terrorist attacks. From 2008 to 2010, however, the national unemployment climbed very rapidly to 10 percent in the midst of the Great Recession; it was during this period that millions of America workers filed unemployment compensation claims.

Unemployment funds are managed by state agencies with the assistance and oversight of the Treasury Department. These funds are supported by contributions collected by the Internal Revenue Service and by state taxation regulators; the funding sources are payroll taxes paid by employers, not by workers.

The Federal Unemployment Tax Act was enacted in 1939 during a particularly harsh era for American workers. During the Great Depression, the unemployment reached levels higher than 25 percent; this made it easy for lawmakers to pass FUTA. At the same time, the U.S. Congress also approved the State Unemployment Tax Act and laid out its rules and revenue collection mechanisms.

Business owners who have an Employer Identification Number, and who pay at least $1,500 in payroll during any quarter of the calendar or fiscal year, are subject to FUTA and SUTA taxation. Another determination of this obligation would be keeping at least one employee on payroll for 20 weeks; this determination applies to full-time, part-time, seasonal, or occasional employees. Small business owners who hire independent contractors in lieu of keeping staff on payroll are not subject to FUTA or SUTA.

Calculating FUTA is part of the IRS Form 940, which must be filed by January 31st. The rate as of 2018 is six percent on the salary paid to each employee up to $7,000 during the calendar year. Let’s say a bookkeeper worked 15 hours per week from early January until the end of July; if the the bookkeeper was paid $20 per hour for her services, she probably made around $8,400, but the FUTA obligation for this part-time employee is capped at $7,000, which means that the tax would be $420.

SUTA calculations vary considerably from one state to another. For the most part, SUTA rates are set within a range that conforms to factors such as the annual salaries of employees, seasoning of the business, industry, and state programs.

In Massachusetts, SUTA taxes start at 0.73 percent and are capped at 11.13 percent. An entrepreneur who opens a new café in Boston, for example, would not have to worry about paying 11.13 percent SUTA; her tax rate would start at 1.87 percent plus 0.056 percent destined towards the state retraining fund and 0.81 percent for an initial assessment of solvency. One of the lowest SUTA tax rates in the United States can be found in Oklahoma.

Business owners who wish to avoid FUTA and SUTA tax obligations can do so by retaining the services of independent contractors and freelancers; however, this often translates into much higher hourly rates and a general aversion to “going the distance” for the company.