State Unemployment Insurance (SUI)
State unemployment insurance (SUI) pays for unemployment compensation to workers who have lost their jobs. The tax is usually an employer paid tax and is not deducted from the employee's check.
Nearly every state has its own wage base limit that will often increase annually. Be aware that rates can change each year and are usually assessed based on your company's past experience with unemployment claims and the type of business you have.
The amount of SUI owed will be dedicated per payroll based on the total gross earnings and SUI rate you entered for the state.
Optional helpful information to consider including: “If you’re looking for information on registering your business in your state, select the state tax registration section of our help center.”
Federal Income Tax (FIT) withholding
Federal income tax (FIT) is withheld from employee earnings each payroll. It's calculated using the following information:
- The amount earned (gross pay)
- Pay frequency
- Employee's federal withholding allowance amount
- Elected on their W-4
- Any other additional withholding amounts specified by the employee
- Elected on their W-4
- Employee's marital status
- Wage base limits
- Exemptions
- Pre-tax benefits
You can also check out IRS Publication 15A for an in-depth description of these tax calculations.
Your employees’ federal income tax withholding will be withheld using the tax withholding information entered into their profile, and the current IRS tax tables.
Wage base limits
A taxable wage base limit is the amount of wages that are subject to taxes in a given time period. Once an employee has hit the wage base limit for a tax, the employee and/or employer are no longer responsible for paying that specific tax in the current year. These common payroll taxes have annual wage base limits per employee:
- Social Security: $142,800 in 2021
- Federal unemployment tax act (FUTA): $7,000 in 2021
- State unemployment insurance (SUI): varies depending on the state
We'll stop applying a tax for an employee in payroll once the year-to-date wages hit the wage base limit. At the start of the next year, we'll reset the year-to-date amount so that the tax is applied again until the annual wage base limit is met.
State Income Tax (SIT)
State income tax (SIT) is withheld from employee earnings each payroll. It is calculated using the following information:
- The amount earned (gross pay)
- Pay frequency
- Employee's state withholding allowance amount
- Any other additional withholding amounts specified by the employee
- Employee's marital status
- Wage base limits
- Exemptions
- Pre-tax benefits
Actual rates differ for each state. Your employees' state income tax using the tax withholding information entered into their employee profile and the state's current tax tables.
Federal Unemployment Tax Act (FUTA)
FUTA
The federal unemployment tax act (FUTA) tax provides payments of unemployment compensation to workers who have lost their jobs. It is an employer-only paid tax.
The FUTA tax rate is 6%, which taxes wages up to the first $7,000 earned by the employee. This totals to $420 in annual FUTA tax amount for each employee. However employers generally receive a credit of 5.4% for paying timely state unemployment taxes. This results in a reduced FUTA tax rate of 0.6%, which totals to $42 in annual FUTA tax amount for each employee. FUTA will be calculated and withheld throughout your payrolls.
FUTA payment schedule
If your FUTA liability exceeds $500 in any given quarter payment must be remitted by the last day of the month following quarter end. This is handled in your payroll account.
FUTA Credit Reduction States
Eachyear, some states may be classified as credit reduction states. These states took a loan from the federal government to help pay their state unemployment insurance benefits. If the states are not on time in paying back that loan, the federal government reduces the FUTA credit given to employers.
Employers in these states will owe a higher amount of tax that will be paid with the annual Federal Unemployment Form 940 in January. The US Department of Labor finalizes the list of credit reduction states every year in November.
SUI Exemptions
When a business or employee(s) are exempt from state unemployment, the business typically is no longer able to apply the 5.4% FUTA Credit and is liable for additional FUTA. Check out pages 3 and 4 of this IRS reference for more information.
The most common scenarios for why a business would be liable for additional FUTA are outlined below:
- Businesses with all employees exempt to state unemployment (SUI)
- Employers that do not pay into state unemployment at all are automatically required to pay the additional 5.4% ($378) in FUTA tax on each employee's wages.
- Businesses with a combination of employees that pay into to state unemployment & employees that are exempt to state unemployment
- Employers that pay into state unemployment for some employees but not others may be liable for up to the additional 5.4% in FUTA Taxes.
- The amount of additional FUTA tax is determined by the Worksheet for Line 10 of Form 940 (found on page 12 here). The amount of additional tax due depends on how much the employer paid into state unemployment taxes. If the business paid enough into state unemployment, they may not be liable for additional FUTA tax at all.
- Businesses that paid state unemployment tax late
- Employers that paid state unemployment tax late may be liable for additional FUTA tax, up to the maximum 6% rate. This is also determined by the Worksheet for Line 10 of Form 940 (found on page 12 here).
- Employers that paid state unemployment tax late may be liable for additional FUTA tax, up to the maximum 6% rate. This is also determined by the Worksheet for Line 10 of Form 940 (found on page 12 here).
Federal Insurance Contributions Act (FICA)
The federal insurance contributions act (FICA) consists of Social Security and Medicare taxes. It was created to help provide for retired workers and the disabled. The tax is calculated using flat percentages of taxable wages and is paid by both the employee and employer.
The following rates will be used for 2021. Learn more about these rates on the IRS website.
- Social Security rate: 12.4% total
- 6.2% for the employer
- 6.2% for the employee
- $137,700 wage base limit
- Medicare rate: 2.9% total
- 1.45% for the employer
- 1.45% for the employee
Social Security
Of the two of these, only Social Security has a wage base limit that frequently sees annual increases. Once an employee reaches the Social Security wage base limit within the calendar year, Social Security tax is no longer calculated on additional wages.
Medicare
Starting in 2013, an extra 0.9% in Medicare tax was added to employees with annual wages over a certain amount. Employers are not required to match the additional tax but are expected to withhold the amount from qualifying employees.
Keep in mind: An employee's filing status will impact the amount of additional Medicare tax owed, but will not impact the employer amount owed.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.