Brace Yourself: SUTA is on the Rise

As unemployment numbers continued to climb throughout the recession, states saw their unemployment trust funds stretched to the limits. Many states (28 in total) have resorted to borrowing from the federal government to pay for the surging number of claims. Not only will this money have to be paid back with interest, the trust funds themselves will need to be replenished.

Not surprisingly, states are reacting by raising State Unemployment Tax Association (SUTA) rates and base wage thresholds, which may double or even triple your current tax burden.

There are two ways that states can raise unemployment taxes. First is by raising the tax percentage rate. For example, the state of New York is looking to raise their average unemployment tax percentage rate from 3.77% in 2009 to 4.40% in 2010.

The second way they can raise unemployment taxes is by increasing the taxable wage threshold. Such is the case in West Virginia, where the taxable wage threshold increased from $8,000 in 2009 to $12,000 in 2010.

States may also choose to increase both the tax percentage and the wage threshold. The tax percentage and wage threshold can vary greatly from state to state, and there’s currently no federal law limiting how often states can increase either number. The changes for 2010 can also be retroactive, which means that as a staffing company owner, your bottom line could take a substantial hit depending on how your state chooses to raise the tax.

What type of increase is better for staffing?

In most cases, increasing the taxable wage threshold tends to be better for staffing companies.

Let’s look at an example provided by Staffing Industry Analysts in their February Update: U.S. Economic Indicators & 2010 Projections

In this example there are two companies, both with annual wages of $8,000,000. Firm A is a staffing company with 1,000 temporary employees, each of whom are paid an annual wage of $8,000. Firm B is not a staffing firm, with 100 permanent employees each earning $80,000 annually. The two firms each pay $8 million in annual wages, but are taxed differently because of the structure of the SUTA calculation.

With a taxable wage base of $7,000 and a tax percentage of 2%, Firm A (the staffing company) has $7 million in taxable wages and would pay $140,000 in unemployment taxes. Firm B (the non-staffing company) would have $700,000 in taxable wages and only pay $14,000 in unemployment taxes.

Both firms are taxed at the same rate on the same wage base of taxable wages ($7,000 per employee), but since the staffing company employs more people for a shorter length of time, it pays more tax in aggregate.

Following this example, we can examine the impact of both a tax rate increase and a wage base increase on each of these companies.

If the tax rate were raised from 2% to 3% (a 50% increase), Firm A (the staffing company) would see an increase of $70,000. Firm B (the non-staffing company) would see an increase of $7,000. Since Firm A has a higher amount of taxable wages, the increase will have an immediate, negative impact on that staffing company’s bottom line.

If the taxable wage base were increased for these same two companies, the impact on the staffing company would be less. Let’s assume the tax rate stayed at 2% and the wage threshold increased from $7,000 to $9,000. For Firm A (the staffing company), their overall tax increase would be $20,000, or 14%. For Firm B (the non-staffing company) their tax increase would be $4,000, or 28%.

 The difference in raising the tax rate versus the wage base for staffing companies is tied to the nature of the staffing industry. Staffing companies tend to employ larger numbers of people, with overall lower annual earnings per employee. When the tax rate is increased, this has an immediate negative impact on a staffing company’s bottom line. This increase will more than likely impact every employee since you have fewer employees that exceed the wage threshold.

When the wage threshold is increased, depending on the industry you serve, you may not ever exceed the higher threshold. Plus, you have more time to recover those costs. An increase in the tax rate is an immediate hit to your bottom line, and can leave you scrambling to recoup those costs from your customers.

It’s imperative that you take these tax rates and potential increases into account when making strategic decisions about your business.

The majority of states have a taxable wage base that is less than $12,000. If states increase their wage base, their tax rate tends to be lower. Nine states are the exception to this rule. These states have both a high tax rate and a high wage base and are the worst for staffing when it comes to SUTA: Michigan, Pennsylvania, Massachusetts, California, New York, Illinois, Rhode Island, Vermont and Kentucky.

Federal Unemployment Tax Association (FUTA)

In addition to the state unemployment insurance tax, there’s also a federal tax of 0.8% on the first $7,000 of wages for each employee. This 0.8% is actually a discounted rate. The actual rate is 6.2% with a 5.4% credit. You get this discounted rate if you pay all your unemployment taxes in a timely manner. There is a catch, however. Your state has to pay all their federal unemployment tax loans in a timely manner as well.

Michigan defaulted on their loan payments to the federal government for the money they borrowed to fund their unemployment claims. Their FUTA rate was 1.1% in 2009 and may increase to 1.4% in 2010. California, Indiana and South Carolina are also facing FUTA increases for this reason. All 28 states that borrowed money from the federal government are in danger of seeing FUTA increases in 2012 if they cannot repay what they have borrowed. Their FUTA rates will increase by 30 basis points every year until the loan is paid off, or they reach the 6.2% rate cap.

In most cases, SUTA increases are unavoidable. It’s imperative that you take these tax rates and potential increases into account when making strategic decisions about your business—including how to recoup that liability in your markup, and when making decisions about expanding into other states.

Your Tricom Funding team proactively calls each state at the end of the year to discover the latest news on new rates and wage base changes. We’ve posted a SUTA tracking tool on our website that includes the 2009 and 2010 wage bases. It also indicates each state’s federal loan amount and FUTA rates. You can find this under the Resources section on our website.

If you’re considering doing business in a new state, we have a helpful reference for you on our website as well. Our State Tax Tools has information about each state’s unemployment taxes, sales taxes, minimum wages, local taxes and more, also located under the Resources page on our website.

If you have specific questions about unemployment taxes, please contact Mary Jo Heim at Tricom Funding at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or at 1-800-348-4815. Mary Jo has been keeping a close watch on SUTA and FUTA changes, as well as how these changes will impact our clients.

Sometimes the best way to save money on unemployment taxes is to pay an expert to take care of it. For this reason, Tricom Funding has partnered with TALX, an unemployment tax management solutions provider.

TALX reduces the hassle of handling claims and meeting state requirements by taking care of it for you. They work directly with you and your managers to collect all the data necessary to meet the state’s deadlines, reducing your claim exposure and improving your results. Or if you have less than 1,000 employees, UC Direct from TALX is a solution designed to help you organize and process your claims yourself. 

TALX will also help you prepare and present a complete and accurate case at any hearings, as well as review your statements for accuracy and protest any erroneous charges.

They also offer a reporting tool that allows you to see the real-time status of claims, appeals and hearings, as well as perform custom reports. They actively work with the Department of Labor and state agencies to improve the process for their clients. They’ll also pass along regular legislative updates and tax intelligence tips to keep you updated on current trends.

For more information, visit their website at
http://www.talx.com/Solutions/Compliance/UnemploymentTax/ or contact Sheila Gramann at 314-214-7387 or at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

While you may not feel like you have much control over unemployment costs, there are some things you can do to help lessen the impact on your staffing company.

1 Proactively manage unemployment claims.

Make sure you have someone looking at unemployment claims closely. Fill in and submit all your forms on time to avoid additional fees. (Remember, Tricom’s Help Desk is available from 7 am to 7 pm CST to help you with payroll histories.) For each claim, check to see if work was available for that employee. If he or she chose not to accept a position, that claim should not be charged to your company. Or, if appropriate, offer to put the person back to work. If you don’t have the internal resources to effectively manage your unemployment claims, consider outsourcing these tasks to an organization that specializes in handling unemployment claims (See: Outsourcing Your Unemployment Claims).

2 Look at wage thresholds when evaluating candidates for placements.

All things being equal, if you are deciding between more than one candidate for a position, examine which candidate is closer (or has reached) the wage threshold for unemployment. If two candidates are equally qualified for a job, choose the one that has already reached the threshold or is closest to it so you can reduce the number of employees on which you’re paying unemployment taxes.

3 Focus on employee retention.

Unemployment tax laws favor those companies with lower turnover. If you focus on retaining the employees you have (and have a rigorous screening process when you bring them on board), you can lessen your unemployment burden by reaching wage thresholds sooner and not paying out on as many claims.

4 Make your voice heard.

Contact your state representatives (or work with your state association to do so) and let them know that if raising unemployment taxes is unavoidable, you prefer an increase to the wage base over increasing the tax rate. When raising the wage base, you have a longer time to recoup that lost revenue from your customers, or, depending on the industry you serve, you may never hit the increased threshold. Let lawmakers know the impact their unemployment tax decisions have on your business.

Rising unemployment taxes are seemingly unavoidable. But there are ways to lessen the impact of these increases on your staffi ng company’s bottom line. By having a renewed focus on your unemployment claims and on your current employees, you can make a positive difference in your overall costs.

Have questions about how you can alleviate your unemployment tax burden? Contact Mary Jo Heim at Tricom Funding at mheim@tricom. com or at 1-800-348-4815.