SUI 101: A Tax Within Your Control

Many employers simply see state unemployment insurance (SUI) as a cost of doing business. Since SUI is a tax, it funds unemployment benefits for workers who have lost their jobs, it can be easy for employers to pay little attention to why their SUI tax rates are rising.

However, SUI is a cost that businesses can control; in fact, SUI is the only controllable payroll tax. It comes down to how you manage your unemployment claims. In this article, we’ll cover how claims can affect your SUI rates, how you can manage claims effectively, and what you can do to protect the health of your SUI rates.

How Do Unemployment Claims Impact SUI Rates?

To better understand the relationship between unemployment claims and SUI rates, we first have to break down how SUI rates work. Each state has its own range of rates, and all new employers get the same rate within a state for two to three years (for example, New York’s 2024 new employer rate is 4.025%). In PEO- and hybrid-reporting states, your business gets the rate assigned to your PEO. In client-reporting states, your business gets its own rate from the state.

If you have an unemployment account in a client-reporting state, the state sends you an annual notice with your SUI rate for the upcoming calendar year. The state uses a number of factors to determine your rate, including payments of unemployment claims. Each awarded unemployment claim can affect your SUI rate for up to three years—similar to how a late or missed payment hurts your credit score and stays on your credit report for seven years.  This means paying claims can lead to costly rate increases that can impact your business for several years. New employers in particular can be taken by surprise once they’re no longer receiving the new employer rate, which tends to be on the lower end of the SUI rate range. After the state has two to three years of claims data for a new employer, they’ll give you an experienced employer rate; if you paid out a fair amount of claims during that time, you may see your rate increase accordingly. 

That’s why managing unemployment claims effectively is the best way to keep your SUI rates under control. 

What Is Effective Claims Management? 

To start, the first step in effective claims management is responding promptly to any notice you receive from the state. If you accept the claim, a fast response means the former employee will receive their benefits quickly. Failure to respond in a timely manner can result in the state automatically awarding unemployment benefits to the former employee even if they’re technically ineligible. As a note, a former employee may be ineligible for unemployment benefits if they quit, were fired for cause, or, in some states, received severance.

Given how much each claim can impact your SUI rate, avoiding claims paid to ineligible former employees is also important for keeping your SUI rates healthy. These kinds of awarded claims, better known as overpayments, typically happen due to employers either taking too long to respond, failing to respond at all, or responding inaccurately to state agency requests. This is a problem for businesses across the country: the Department of Labor (DOL) reports that the national improper payment rate, which is based on overpayment data across all states, was 16.47% in 2023. It’s supposed to be under 10% per federal law.

This is where the State Information Data Exchange System (SIDES) comes in: SIDES, developed by the National Association of Workforce Agencies (NASWA) in partnership with the Department of Labor, is designed to improve the unemployment claims experience for employers, PEOs, and other third-party administrators. Unlike other PEOs, Justworks is a SIDES broker; that enables us to process unemployment claims electronically on your behalf, ensuring timely, accurate, and proper responses to the state. This ultimately frees you from the administrative burden of trying to make sure only eligible claims are paid out. 

Lastly, keep records whenever an employee leaves your company, whether voluntary or involuntary. Not only is this required by law, but these documents will come in handy if you ever receive a notice of an unemployment claim that may result in an appeal.. At Justworks, our PEO customers have access to an employee separation flow that streamlines the record-keeping process and captures information that can be used to respond to a claim.

Final Thoughts on SUI

As the only controllable payroll tax, SUI offers businesses an often underutilized, yet incredibly valuable way to manage their costs. Remember: responding quickly and accurately to unemployment claims from all former employees ensures compliance with state and federal laws, facilitates timely and proper payment of benefits, and can help keep your SUI rates as low as possible. Looking to protect the health of your organization’s SUI rate(s)? As a Justworks customer, our team of SUI experts will respond to claims, appeals, and partner with you as your employer representative to attend hearings on your behalf in states where we have the authority to do so. Get started with Justworks today!