Tips for Reducing Your Business’ SUTA Tax Rate

The COVID-19 pandemic has had a significant impact on unemployment across the United States, industries, and major demographic groups, according to a report by the Congressional Research Service. In April 2020, “the unemployment rate peaked at an unprecedented level, not seen since data collection started in 1948,” says the report.

Although the unemployment rate has declined since the beginning of the pandemic, it still remains at an elevated level. As one might expect, an increase in the unemployment rate corresponds to an increase in unemployment filings, which inevitably tie to employers’ State Unemployment Tax Act (SUTA) rates. Generally, the more unemployment benefits drawn on the employer’s SUTA account, the higher the employer’s SUTA tax rate.

Some states have provided relief by assuring employers that their SUTA tax rate will not increase because of COVID-19-related unemployment claims. However, not all states have taken this action. Furthermore, even in a post-COVID-19 world, an employer’s SUTA is still partially driven by the number of unemployment benefits drawn on their account. So, COVID-19 notwithstanding, employers should take whatever measures possible to keep their unemployment rate as low as possible.

Let’s explore steps currently being taken by the American Payroll Association (APA) to curtail employer’s SUTA rates, and steps you can take as an employer.

Furthermore, even in a post-COVID-19 world, an employer’s SUTA is still partially driven by the number of unemployment benefits drawn on their account. So, COVID-19 notwithstanding, employers should take whatever measures possible to keep their unemployment rate as low as possible.

The APA writes to Congress

On October 9, 2020, the APA sent a letter to Congress, asking them to “provide relief from substantial increases in unemployment insurance (UI) taxes forecast to begin in 2021.”  The purpose of this request, the APA says, is “to avoid impeding economic recovery and discouraging hiring and employment growth.”

As the APA notes, the state unemployment system is totally funded by employer SUTA taxes, except for a few states that require both employers and employees to pay SUTA taxes.

The APA points to data from the U.S. Department of Labor, showing that regular unemployment benefits charged to employers rose from $25.5 billion in 2019 to almost $80 billion in the initial 7 months of 2020. Per the APA, employers should not have to shoulder the entire cost of unemployment caused by COVID-19 government orders.

Among other things, the APA asked Congress to contribute to state unemployment trust fund accounts to pay for increases in unemployment benefits linked to COVID-19.

Remember, the APA’s plea to Congress is specific to COVID-19, and SUTA taxes are an ongoing business expense. Therefore, whether COVID-19 exists or not, you’ll want to develop your own long-term strategies for keeping your SUTA tax rate down. Here are 5 tips.

1. Understand what drives employer SUTA rates

Each state sets its own criteria for state unemployment taxes. In many states, an employer’s SUTA rate is determined by these factors:

• How long the employer has been in business. New employers get a new-employer tax rate
• The employer’s industry. Construction employers tend to have a higher rate than non-construction employers
• After the employer has been in business for a while (such as 1 year), the employer starts receiving an experience rate — which takes into account the employer’s SUTA taxes paid, amount of benefits charged on the employer’s account, and whether the employer has been filing their wage reports on time

Every year, the state workforce/unemployment agency sends employers their individual SUTA tax rate. The employer’s SUTA rate is only part of the equation, with the state’s annual wage base being the other half. For example, California’s annual SUTA wage base for 2021 is $7,000. So, if your employees work in California, simply multiply your SUTA tax rate for 2021 by the first $7,000 paid to each employee in 2021 to arrive at your SUTA contributions for that year.

2. Hire and terminate judiciously

Employees who you let go due to no fault of their own, such as a layoff, are eligible for unemployment benefits.

Employees who you let go due to no fault of their own, such as a layoff, are eligible for unemployment benefits. Also, employees whose pay or work hours have been involuntarily reduced may qualify for partial unemployment benefits. Note, as well, that in many states employees can collect unemployment if their employer fired them for reasons other than misconduct.

So, before you fill a permanent position, make sure there’s a real need for you to do so and that your business’ forecasts are good in terms of growth. The last thing you want is to hire someone only to have to lay them off a few months later because of cash flow problems.

Be sure to thoroughly vet chosen candidates and adequately train your new hires to minimize the chance of having to terminate them for poor performance — which might qualify them for unemployment.

If you have to lay off employees, consider offering them recommendation letters and outplacement services to boost the odds of them quickly finding another job.

3. Consider joining your state’s worksharing program

Many states have worksharing programs that enable employers to temporarily reduce employees’ work hours — instead of implementing layoffs — during economic slowdowns. In turn, the impacted employee can collect partial unemployment. The goal of work-sharing programs is to reduce unemployment by helping employees to keep their jobs.

Utilizing the work-sharing program will not stop your SUTA tax rate from increasing, but it will help you to keep your employees on board. As stated by the National Employment Law Project, “Employers who have a stable workforce and who pay out fewer benefits tend to have lower tax rates than those that have frequent layoffs.”

4. Make a buydown payment if your state allows it

In some states, employers can make tax-rate buydowns annually to lower their SUTA rate. “Buydown” means that employers with unemployment benefits charged to their account can purchase all or part of those benefits. Once they’ve made the buydown, their SUTA tax rate will be recalculated based on their reduced amount of unemployment benefits. Note that the buydown process varies by state.

5. Verify the accuracy of unemployment claims

If a former employee has filed for unemployment against your business, the administering agency will notify you of the claim plus give you an opportunity to evaluate the claim and contest it if needed.

Employers should never automatically assume that an unemployment claim is correct. Instead, review the claim fully for accuracy, and if it’s off-base, decide whether to contest it.

Before you contest a claim, make sure you’re on legally sound ground. For example, if the employee was fired for gross misconduct (which disqualifies them from collecting unemployment), ensure you have supporting documentation to back up your case.

Avoid SUTA dumping schemes

This is more of a warning, than a strategy.

As you seek ways to lower your SUTA tax rate, one route to avoid is “SUTA Dumping,” which refers to tax evasion schemes that some employers use to quickly and improperly reduce their SUTA rates.

The California Employment Development Department says that SUTA Dumping “compromises the integrity of the UI system.” Moreover, it “results in an uneven playing field” plus “adversely affects tax rates for all employers.” Ultimately, SUTA Dumping improperly (and unfairly) shifts the unemployment benefits costs from the SUTA Dumping employer to other employers in the state.

To combat SUTA Dumping, states have implemented steep penalties on employers that engage in that practice. These penalties may include monetary fines and criminal prosecution.