What are Tax Payroll Cut-Off’s?

On January 1 of each year, and anytime an employee changes from one employer to another during the year, the accumulators for payroll taxes start over.  Payroll taxes are FICA (Social Security and Medicare at 6.2% and 1.45% respectively), FUTA (Federal Unemployment Tax) and SUTA (State Unemployment Tax).

For 2012 the FICA limit is $110,100.  This means that when an employee earns this amount in a calendar year, the employer no longer pays the 6.2% for Social Security but only continues to pay the 1.45% for Medicare.  We can probably all agree that most employees do not meet this number annually.

The limit for FUTA is $7,000 nationally.  The percentage billed is .80% of those wages.  In some states, due to severe unemployment, there are additional monies that may be collected on top of the standard .80%.  However when an employee has earned $7,000 in a calendar year the FUTA tax is no longer required to be paid for that particular employee.

Additionally, SUTA is paid by the employer to a certain limit of wages annually.  This amount varies from state to state.  In Florida that amount is $8,500.  Once any particular employee in Florida reaches paid wages of $8,500 then that employer no longer is required to pay in SUTA on that employee.

Co-employers differ from one another in how they capture these dollars within the service fee or “Labor Rate” that they bill.  Some will honor the Cut-offs within whatever region the employer is located and some will continue billing the taxes past the Cut-off limits.  Neither one is right or wrong as long as you are aware of the amount being billed.

If you were to start a new business in the state of Florida you would be charged 2.7% on the first $8,500 in wages per employee for the SUTA portion of employer taxes.  2.7% is considered the new employer rate and fluctuates from this percentage based on how many unemployment dollars are utilized by that employer.  A Co-employer may contract with this business and bill within the service fee, 2.5% for example for SUTA.  If that Co-employer honors the cut-off of $8,500 then this is not a bad deal for the client.  If however that Co-employer bills beyond cut-off for the employees, they may be making up for an artificially low administrative fee or workers’ compensation percentage.  In the proposal process they may look more appealing than the competitor, but if they bill beyond cut-offs they are indeed going to cost more.

Conversely some Co-employers bill FUTA and SUTA at a much lower level on purpose.  These Co-employers will try and determine what the unemployment picture has looked like for that client/prospect over the last few years.  They will then arrive at a number (say 2.5% for SUTA) and derive a percentage that when billed all year will amount to the same dollars as if they were utilizing the cut-off.  At 2.5% for the first $8,500 you would pay roughly $212 for SUTA for a particular employee.  Using a smaller percentage, say .75%, but billing all year on a $30,000 per year wage would equate to roughly $225.

Much depends on your turnover and how much unemployment has been paid to workers from your account.  In all it is good to understand how taxes are paid and what you are paying within your service fee.

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