Just about every worker counts on it and almost every employer has paid it, but few understand it. What’s that? Unemployment taxes. Who pays it and how? Once you see how it works, it makes sense. The Payroll Department thinks it’s time everyone got an easy-to-understand explanation.
The Federal Unemployment Compensation Act (FUTA) was enacted in 1939. Its purpose was to establish a national trust fund that would do two things:
- aid workers who lost work through no fault of their own
- stabilize the economy in times of recession
FUTA tax is paid entirely by employers and was set at a certain percentage (6%) of a worker’s income up to a specified amount ($7,000). In 1976, a .2% additional amount was added temporarily, but has been continually extended ever since. The money is collected into a trust fund.
The State Unemployment Tax Authority (SUTA) laws vary state to state. States receive a portion of the FUTA funds and collect additional amounts from employers. The rate an employer pays is adjusted annually based on the fluctuations in the number of employees and the balance in the employer’s “account,” which changes depending on claims.
Claims occur when a worker files for unemployment benefits and receives them. The payments made to the ex-worker are deducted from the “account” until that employee’s benefits are exhausted. Therefore, if an employer eliminates many employee jobs in one year, the next year’s rate could be very high because the balance of the “account” is low.
The amount an employer pays is based on the rate times the first so much wages an employee earns, for example $9,500. If the rate is 8%, then the employer would have to pay 8% x $9,500, or $760, for each employee for the year. After the employee earns the first $9,500, the employer no longer has to make deposits for that employee.
If an employee earns $8,000 and leaves, the employer hires a replacement and the SUTA payments start again for the new worker. When turnover is high, employers could pay several times over what would be paid if all employees were retained for the entire year.
As a payroll provider, The Payroll Department escrows the SUTA and FUTA payments each pay period with deposits made to the appropriate state and federal agencies on a quarterly basis. Small business owners who handle their own payroll can get into trouble when funds for unemployment taxes do not get set aside and the money is not there when it is time to pay the taxes.
Using payroll services not only ensure your payroll is processed accurately, but helps entrepreneurs keep on top of payroll and unemployment taxes.
Why take the chance? Contact The Payroll Department to be your payroll department!
-Elaine of The Payroll Department Blog Team