Navigating the complex requirements of payroll taxes can be challenging for even the most seasoned accounting professional. This is especially true of state-specific obligations, including State Unemployment Insurance (SUI) and State Income Tax (SIT). Although payroll services are an important part of the job, a refresher may be in order to ensure you are managing SUI and SIT efficiently for your clients.
State Unemployment Insurance: A Summary
SUI is a state-level program that provides temporary financial relief to employees who have lost their job through no fault of their own. Also known as SUTA (State Unemployment Tax Act), it is designed to help workers get back on their feet after involuntary unemployment such as layoffs or non-performance related job loss.
Because SUI tax is administered by individual states, there is variation in tax rates, wage base, benefits, and eligibility criteria. In most states, SUI is paid by the employers. But in some states, including Alaska, New Jersey, and Pennsylvania, the employee contributes.
The SUI tax rate can also vary depending on the type of industry (for example, construction), whether the business is new, the size of the company, and the number of employees claiming benefits. Non-construction SUI tax rates range from 1 percent to over 4 percent.
SUI: The Basics
- Wage Base: Most states have a taxable wage base for state unemployment insurance, and this varies from state to state. The Federal Unemployment Tax Act (FUTA) requires the minimum wage base to be $7,000 per employee, but in many states, it is much higher.
- SUI Calculations: In its simplest form, the amount an employer must pay for unemployment insurance is the state wage base multiplied by the tax rate divided by 100. For example, in California, which has a $7,000 wage base, a new employer at a UI rate of 3.4 percent would pay $238 per employee.
- Experience Rating Systems: This calculation is used to determine an employer’s SUI tax rate. New employers are assigned a standard rate for a specific time period, usually a few years. As the employer’s experience increases, the tax rate changes. Also impacting the rate is the number of unemployment claims filed and paid. Companies with fewer layoffs are rewarded with lower unemployment tax rates.
- Exemptions: In some states, employees under 21 are exempt from unemployment insurance taxes, as are some non-profit organizations. SUTA is not necessary for independent contractors (1099 contractors), as they pay their own self-employment taxes.
- Multi-State Employers: Companies formed in one state that have employees in another state must follow the guidelines in the state in which the majority of the employee’s work is conducted.
- Eligibility Requirements: In most cases, in order to qualify for unemployment benefits, an employee must have lost their job through no fault of their own, meet state-specific requirements for wage base and time worked, and be actively seeking new employment.
Income Tax: State by State
Like federal income tax, state income tax (SIT) is levied on residents’ earnings. Currently, all states require income tax apart from Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Similar to unemployment insurance tax, State Income Tax (SIT) must also be handled through payroll. And because the rules vary greatly from state to state, accounting professionals must be well-versed in the specific requirements of each to maintain compliance with their clients’ tax obligations.
Considerations for State Income Tax
One of the key takeaways about SIT concerns residence and domicile. Residence refers to the individual’s permanent or primary home, while domicile is a legal term that refers to the state in which income is subject to tax. Therefore, it is essential to make an accurate determination regarding domicile because SIT will follow the guidelines set forth by that state.
Each state has its own method for determining residency. This includes factors such as the person’s physical presence in the state, their property ownership, voter and vehicle registration, and family connections, among others. Some consider the 183-day rule, meaning if an individual is in a state more than half the year, or 183 days, then they can be considered a resident of that state.
There is also the “convenience of employer” rule, where remote workers can be taxed in both the state in which they reside and the state in which their employer is located, but only when the arrangement suits the employer. Several states currently have some form of this rule on the books: Connecticut, Delaware, Nebraska, New Jersey, New York, and Pennsylvania.
Each state also has its own tax rates and brackets, so accounting professionals must be up to date on each. Every state offers various credits and deductions, such as earned income credits, dependent care credits, and medical expense deductions, among many others.
Understanding SUI and SIT
Accounting professionals have a deep understanding of the complex world of state tax obligations, including state unemployment tax and state income tax. The rules that govern them are frequently in flux, but staying informed on these changes ensures you provide your clients with accurate, timely, and dependable service. Taking a proactive approach to SUI and SIT not only ensures your client remains compliant, it can also position you as an expert in the field of payroll management.
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Nellie Akalp is a passionate entrepreneur, recognized business expert and mother of four. She is the CEO of CorpNet.com, the smartest way to start a business, register for payroll taxes, and maintain business compliance across the United States. Loved by entrepreneurs, accountants and lawyers, CorpNet offers transparent pricing and a simple ordering process. Payroll service providers and larger firms appreciate CorpNet’s quickly scalable software and API solutions.
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