This blog post is specific to Iowa. SUTA = state unemployment tax.
In Iowa, when a 1-person LLC makes an election to be taxed as an S-corporation and pay the owner a salary, the salary is NOT automatically subject to state unemployment tax. Instead, the owner has the option of making themselves subject to unemployment tax.
On the surface, it seems like the 1-person LLC S-corp wouldn’t want to opt into paying unemployment tax, since it gets them out of paying the tax.
But let’s look at why opting into paying Iowa unemployment tax is the right move.
FUTA — federal unemployment tax — is owed on these wages, even if SUTA is not. Let’s look at the specifics of the FUTA calculation.
FUTA is based on the first $7,000 of wages paid. Generally we say the rate is .006 (0.6%). But that is ONLY if the wages are subject to state unemployment tax.
If the wages are not subject to state unemployment tax* (see the note at the end) then the FUTA rate is 6.00% instead of 0.6%.
Let’s say an S-corp pays the owner $50,000 of salary and chooses not to be subject to Iowa unemployment tax. Their FUTA rate becomes 6% of $7,000, or $420.
Now let’s say the S-corp decides to make the wages subject to Iowa unemployment tax. For 2020 the basic Iowa SUTA rate is 1% of the first $31,600 of wages. So on $50,000 of wages, a 1% tax is owed on $31,600, which equals $316.
Because the wages are subject to SUTA, the FUTA rate now drops to 0.6% of $7,000, or $42.
$316 + $42 = $358, versus $420. A savings of $62.
*-When we say wages not subject to SUTA, that means not subject at all to SUTA tax. It does NOT mean that your SUTA rate is 0% (which it can be, at least in Iowa, if you haven’t had any claims against your SUTA account for a long enough period of time), nor does it mean wages in excess of the SUTA cap ($31,600 in Iowa for 2020). It means the wages are not subject at all to the SUTA system.
In addition, for S-corporation shareholder health insurance, these amounts are counted as wages subject to federal (and state) income tax but not to FUTA or SUTA (at least not in Iowa), and so those are not a part of this discussion either.