Recently, a small business owner told us they’d been paying unemployment taxes on their own wages but didn’t feel that was correct. They didn’t know if they could even collect unemployment, so why would they be paying it? Answers to this can vary based on your state and circumstances.
Luckily, if you’ve been paying unemployment taxes for yourself by mistake, coming on board with CSI Accounting & Payroll could mean you get up to four years’ worth of refunds (just like other clients in the past).
At CSI Accounting & Payroll, we’ve worked with small business taxes for over 50 years. Since then, we’ve gotten a lot of questions about owners’ unemployment taxes, such as:
- What state laws do I need to know about for owner unemployment?
- Should I pay unemployment for myself as the owner?
- Why would I seek a refund? How can CSI help?
Owner Unemployment State Laws
Each state has its own rules for corporation owners’ wages and unemployment taxes. For some, you can opt out of coverage, while others allow you to opt into coverage.
To determine what’s best for your situation, you first need to determine if you are in a state that considers owners’ wages covered or non-covered for unemployment purposes.
Then, you need to find out whether your state allows owners to opt out (for covered wages states) or opt in (for non-covered wages states).
Covered Wages States
Most states are covered wages states, meaning business owners are automatically included in unemployment insurance programs, but many of them allow you to choose not to be.
These states generally allow you to draw benefits if your business gets shut down, provided the taxes were paid accurately and timely. They allow you to opt out of coverage, thereby not paying tax on your wages.
To find out if you’re in a covered wages state, just ask your payroll specialist! Otherwise, if you do your own payroll, you can check your state’s unemployment website for its employer handbook.
Non-Covered Wages States
If you are in a state that doesn’t require corporation owners to pay unemployment tax on themselves, then your wages are considered non-covered and you would not be eligible for benefits – even if you paid the tax.
Just like with covered wages states, your payroll specialist can tell you if you’re in a non-covered wages state. If you handle payroll in-house, search your state’s unemployment website for its employer handbook.
Note: states can have limits on who is considered an owner. For instance, in Minnesota – an opt-in state – only wages of individuals who own 25 percent or more of the company are considered non-covered.
Owner Unemployment Tax Requirements
As a small business owner, you’re required to pay unemployment taxes for your employees, but should you also pay them for yourself? In some cases, you may be required to pay, and in others, you may not be required to pay.
One of the determining factors in deciding if you’re better off paying state unemployment taxes (SUTA) on owners’ wages is whether or not you will lose your federal unemployment (FUTA) credit.
When a business pays SUTA tax on all of its FUTA taxable wages, it receives a credit of 5.4%, reducing the max rate of 6.0% down to 0.6%. If some of the FUTA taxable wages are exempt from SUTA tax because they are considered non-covered wages, the line 10 worksheet of the IRS Form 940 must be completed to determine if all or part of the credit is lost.
Reasons to Pay Unemployment
Again, in most states, you’re required to pay unemployment tax on your wages by default. However, many of these states allow options, including opting in or opting out.
If you would lose your FUTA credit by not paying SUTA tax (and the credit value exceeds your SUTA tax payments for the year), then you’re better off continuing to pay SUTA taxes since you’d actually be saving money.
Plus, the biggest benefit is that if you ever need to draw benefits, then they may be available to you!
Reasons Not to Pay Unemployment
If you’re not going to lose your FUTA tax credit and the chance of you needing to draw unemployment benefits is very low, then why not save the money? It can be that simple.
How CSI Retrieves Unemployment Tax Refunds
In the past, we’ve had new clients say they want to get an unemployment tax refund. Here’s how we would do that.
Getting the Refund
When it’s time to move forward with a refund, we can start the process to retrieve up to the prior four years.
We’ll go back and amend all of the quarterly returns for that time period and charge a small fee (per form and per quarter) for doing so.
Future Payments
After getting the refund, we’ll also make sure that your payments (or lack thereof) are correct moving forward. For many clients who seek a refund, they don’t want to pay into unemployment anymore in the future.
Handle Owner Unemployment Tax the Right Way for Your Business!
Now that you know whether owners should pay unemployment for themselves, what state laws you need to consider, and why and how to get a refund of unemployment tax payments, are you ready to check out payroll services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what goes into the cost of a payroll service by clicking the image below:
