COVID-19: Will Your SUTA Tax Rate Go Up?

The COVID-19 pandemic has caused a surge in layoffs, furloughs, and reduced work hours. Consequently, employers may be wondering whether COVID-19-related unemployment claims will cause a spike in their state unemployment tax rate.

For some employers, the answer is “no.” Others, however, aren’t so lucky and can expect an increase in their SUTA tax rate.

What is SUTA tax?

The State Unemployment Tax Act (SUTA) authorizes states to impose state unemployment insurance/tax on employers. The tax is used to pay benefits to employees who lose their job through no fault of their own.

In most states, only the employer pays SUTA tax. However, a few states — namely, Alaska, New Jersey, and Pennsylvania — require both employers and employees to pay SUTA tax.

Each state is responsible for establishing their own SUTA tax rates for employers (and applicable SUTA withholding rates for employees) along with the annual SUTA wage limit.

Generally, states set SUTA tax rates according to the nature of the employer’s business, the length of time the employer has been in business, and the number of benefits drawn on the employer’s unemployment account. For this reason, SUTA tax rates often vary by employer.

What does COVID-19 have to do with SUTA?

Employees who are laid off or furloughed because of COVID-19 can collect unemployment benefits. Those with reduced work hours might qualify, as well.

Earlier this year, Congress passed the CARES Act, which:

• Extends unemployment compensation from 13 weeks to 39 weeks
• Provides an additional $600 in weekly unemployment compensation from March 29 to July 25, 2020
• Allows states to give unemployment benefits to self-employed individuals

Normally, the more unemployment benefits drawn on your account, the higher your SUTA rate. And with the COVID-19 pandemic having caused unemployment claims to soar, whether your SUTA rate will escalate as a result is a legitimate concern.

Will SUTA rates rise because of coronavirus-related unemployment claims?

First, the additional $600 supplied by the CARES Act is 100% federally funded and has no bearing on your state unemployment tax rate.

Second, a number of states have said that COVID-19-related unemployment benefits will not raise employers’ SUTA rates.

For example:

• Pennsylvania’s unemployment compensation division says that employers’ SUTA tax rates will not increase because of coronavirus-related claims.
• Per the Utah workforce agency, COVID-19-related unemployment benefits costs will be applied to the Department’s social cost account instead of to Utah employers’ unemployment accounts.
• In Minnesota, unemployment benefits collected as a result of COVID-19 will not count towards the employer’s future SUTA tax rate.
• Employers in Colorado won’t be charged for unemployment benefit claims stemming from COVID-19.
• In Michigan, employers who were forced to close or reduce operations because of COVID-19 will not experience a hike in their SUTA rate if their employees file for unemployment benefits.

Not all states are providing relief

For example, employers in Delaware may experience an increase in their SUTA rate for COVID-19-related benefits paid, though they can apply for a rehire credit. In New Jersey, as well, employers could see a jump in their SUTA rates, for coronavirus-related benefits claims.

In states such as these, the impact of COVID-19 on an employer’s SUTA rate may depend on various factors, including:

• The number of displaced workers
• How long the unemployment benefits last
• The likelihood of the economy bouncing back
• Whether financial assistance is available from the federal government

To know whether your SUTA rate will increase because of COVID-19-related unemployment claims, contact your state’s unemployment/workforce agency.

If your SUTA tax rate will increase, it likely won’t occur until 2021

Most states send employers their SUTA rate for the following year by the end of the current year. Because these employers’ SUTA rates for 2020 have already been established, rate increases caused by COVID-19-related claims won’t happen until January 2021.

However, in states such as New Hampshire and New Jersey, SUTA rates are determined on a mid-year or fiscal-year basis. Employers with COVID-19-related claims in these states might experience a SUTA rate increase in 2020.

Work-from-home SUTA considerations

If, due to COVID-19, you have employees working from home in a different state from your business location, make sure you’re paying SUTA tax for those employees to the correct state.

As stated by Ernst & Young, “unemployment insurance applies only in one state and is generally paid where the employee’s work is localized.”

The work is localized in the state if the employee does all the work in that state, or if the employee’s work outside of the state is “is temporary or transitory in nature or consists of isolated transactions.”

So, if you have employees temporarily working from home due to COVID-19, you generally can keep paying their state unemployment tax to the state they normally work out of.

For updates on SUTA tax changes caused by the COVID-19 pandemic, contact your state unemployment insurance agency. New developments may be available on the agency’s website.

Or if your small business uses Zenefits, reach out to the Advisory Services team for expert assistance.