SUI and SDI tax are two separate state payroll taxes with different purposes: State Unemployment Insurance (SUI) tax funds benefits for workers who lose their jobs through no fault of their own, while State Disability Insurance (SDI) tax funds partial wage replacement for workers temporarily unable to work because of a non-work-related illness, injury, or pregnancy. SUI is paid by employers in all 50 states and the District of Columbia. SDI is mandatory in only a handful of jurisdictions and is usually withheld from employee wages rather than paid by the employer. Both taxes work the same way arithmetically — a percentage rate applied to a capped amount of each employee’s wages — but almost every other detail varies by state.
What SUI Tax Pays For and Who Pays It
Every state runs an unemployment insurance trust fund, and employer SUI contributions are the sole source of the benefits paid out of it. When a former employee files a successful claim, the benefits get charged against the employer’s account. That charge history drives your tax rate the following year, which is why SUI is a cost you can actually influence.
In most states, SUI is entirely the employer’s responsibility. Three states also require a small employee contribution withheld from wages. The Federal Unemployment Tax Act sets the framework, but each state picks its own rates, wage bases, and benefit levels.
How SUI Tax Is Calculated
Your SUI bill per employee is two numbers multiplied: your assigned tax rate, and the state’s taxable wage base. The wage base is the annual cap on wages subject to the tax. Once an employee’s earnings pass the threshold in a calendar year, you stop owing SUI on that person’s additional wages until January.
The Taxable Wage Base
Wage bases vary enormously between states. Some sit as low as $9,000 per employee. Others run above $70,000. Washington state’s 2026 taxable wage base is $78,200, so employers there owe SUI on a much larger slice of each paycheck than employers in low-base states. These thresholds get reviewed and often adjusted annually, so check your state’s current figure at the start of each year.
The math is straightforward. If your state’s taxable wage base is $15,000 and your assigned rate is 2.5%, you owe $375 in SUI tax per employee ($15,000 × 0.025). Once that employee crosses $15,000 for the year, your obligation for that worker is done.
Your Experience Rating Sets Your Rate
The rate isn’t random. States use an experience rating system that ties your rate to how much your former employees have collected in unemployment benefits. Stable operation with low turnover means fewer claims, and your rate stays low. Frequent layoffs mean more claims charged to your account and a steeper rate the following year.
State agencies calculate the ratio by comparing benefits charged to your account against your total taxable wages over a look-back period, typically three to five years. That ratio places you on a schedule of rates the state publishes. Employers with the best ratios can pay a fraction of a percent. Those at the high end can face rates above 8%, depending on the state.
New businesses don’t have a track record yet, so they get assigned a standard introductory rate for their first two to three years. In California, that new-employer rate is 3.4%. Once you’ve been operating long enough to build claims history, the state shifts you to an experience-based rate that could be higher or lower.
Contesting Claims to Protect Your Rate
Because your experience rating drives your rate, every unemployment claim carries a real dollar cost. When a former employee files, the state notifies you and gives you a window to respond, often as short as ten days. If the employee quit voluntarily or was terminated for documented misconduct, contesting the claim with supporting evidence can keep the benefits from being charged to your account.
Employers who ignore these notices or respond late effectively accept the charge. Uncontested claims that could have been disputed pile up over time and inflate your rate. This is one of the most overlooked areas of SUI cost management.
How SUI Interacts With Federal FUTA Tax
On top of state unemployment tax, employers pay federal unemployment tax under FUTA. The gross FUTA rate is 6.0% on the first $7,000 of each employee’s wages. The IRS allows a credit of up to 5.4% for employers who pay their state unemployment taxes in full and on time, which drops the effective FUTA rate to 0.6%.
Earning that full credit requires meeting every condition: you paid all state unemployment taxes due, you paid them by the Form 940 filing deadline, and your state isn’t a credit reduction state. If any condition slips, your federal bill rises.
Late state payments hit twice. Under the Form 940 instructions, employers who pay state unemployment tax after the Form 940 due date receive only 90% of the credit they would have earned on that late portion.1Internal Revenue Service. Instructions for Form 940 Multiplied across a large payroll, that haircut adds up quickly, and it’s entirely avoidable.
The other way employers lose the credit isn’t their fault. When a state borrows from the federal government to shore up its unemployment trust fund and doesn’t repay within two years, employers in that state face a FUTA credit reduction. It starts at 0.3% and grows by another 0.3% for each additional year the loan stays outstanding, with additional surcharges possible after the third consecutive year.2Department of Labor – Office of Unemployment Insurance. Potential 2026 Federal Unemployment Tax Act (FUTA) Credit Reductions The result is a higher effective FUTA rate for every employer in the affected state, regardless of their own claims history. The Department of Labor publishes the list of potentially affected states each year, with final determination hinging on whether outstanding loans are repaid by November 10.
Form 940 is due January 31 of the following year, extended to February 10 if you deposited all FUTA tax when due during the year.3Internal Revenue Service. Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements
What SDI Tax Pays For and Where It Applies
State Disability Insurance provides partial wage replacement when workers are temporarily unable to work because of a non-work-related condition. That includes illnesses, injuries, surgeries, and pregnancy-related disabilities. SDI is separate from Workers’ Compensation, which only covers conditions arising from the job itself.
Unlike SUI, SDI isn’t a nationwide requirement. The states that currently operate mandatory SDI programs are California, Hawaii, New Jersey, New York, Rhode Island, and Washington. A few additional jurisdictions, including Massachusetts, have enacted paid leave programs that include similar medical leave benefits, though structured differently. If you don’t employ workers in one of the SDI states, this tax doesn’t apply to you.
SDI is typically funded through employee payroll withholding rather than employer contributions, though the split varies by state. In some states the employer also contributes or can choose to cover the full cost. Benefits are generally calculated as a percentage of the worker’s average weekly wages during a recent base period, with state-specific weekly caps.
How SDI Tax Is Calculated
The basic calculation mirrors SUI: a contribution rate multiplied by taxable wages. California’s 2026 SDI contribution rate is 1.30%, which employees pay through a single payroll withholding line that also funds the state’s Paid Family Leave program. Other SDI states set their own rates and wage caps independently, and some adjust them annually based on fund solvency.
In states like New York and New Jersey, employers can satisfy the SDI requirement through an approved private insurance plan instead of using the state-run program. The private plan has to meet or exceed the state’s minimum benefit standards and be approved by the state regulator. Larger companies that can negotiate group rates sometimes find better pricing or more flexibility this way.
Several SDI states have layered Paid Family Leave programs on top of disability insurance, often funded through the same payroll withholding. California’s SDI withholding covers both disability benefits and Paid Family Leave under a single contribution rate. Workers use the two programs sequentially for events like childbirth: SDI covers the recovery period when the parent is medically unable to work, then Paid Family Leave provides income during bonding time.4First 5 California. FAQ – Whats Different About Paid Family Leave and State Disability Insurance in 2025 For employers, that means one payroll deduction funds multiple leave benefits.
Registering, Filing, and Paying
Register with your state workforce agency as soon as you hire your first employee. Registration gives you a unique SUI account number and an initial tax rate. Putting it off is expensive: it can trigger penalties, interest on back taxes, and retroactive assignment of the highest available tax rate.
SUI tax and wage reports are filed quarterly. Each filing covers the previous three months and includes two components: the tax payment itself, and a detailed wage report listing every employee’s name, Social Security number, and total wages paid during the quarter. Some states also require hours worked. Nearly all states now require or strongly prefer electronic filing through their online portals.
Quarterly deadlines follow a predictable pattern: April 30 for Q1, July 31 for Q2, October 31 for Q3, and January 31 for Q4. Missing a deadline doesn’t just mean a state late penalty. Late state payments can also reduce your federal FUTA credit, compounding the cost.
Remote Workers and Multi-State Filing
When employees work in a different state from the employer, most states apply the same sequential tests to decide which state gets the SUI tax. The first test asks where the work is physically performed. An employee working entirely from home in one state generally means that state gets the SUI tax, regardless of where the employer sits.
If the work isn’t clearly localized in one state, backup tests apply in order: the employee’s base of operations, then the location where the employer directs and controls the work, and finally the employee’s state of residence. Only the first test that produces an answer applies. The goal is to make sure each employee’s wages are reported to exactly one state.
For employers with workers scattered across multiple states, this means registering for SUI in each state where employees are localized, tracking each state’s separate tax rate and wage base, and filing quarterly in every jurisdiction. The administrative load scales with the number of states involved.
Worker Classification and Penalties
SUI applies only to employees, not independent contractors. That creates an incentive to classify workers as contractors, but misclassification is one of the most expensive payroll mistakes a business can make. State agencies actively audit for it.
An employer caught misclassifying workers typically owes all unpaid unemployment taxes plus interest and penalties going back several years. At the federal level, unintentional misclassification can result in a penalty of 1.5% of wages paid plus 40% of the FICA taxes that should have been withheld, and those percentages can double if no Form 1099 was filed. Willful misclassification raises the stakes: potential liability for 100% of both the employer’s and employee’s share of employment taxes, additional fines of 20% of all wages paid to the misclassified workers, and possible criminal charges.5Internal Revenue Service. Employment Tax Penalty, Fraud, and Identity Theft Procedures
Non-filing carries its own consequences. When quarterly wage reports aren’t filed, most states estimate your tax liability from whatever information they have, and those estimates aren’t generous. The estimated assessment stands until you file a corrected report, and penalty surcharges often apply on top. Some states add a 2% or higher penalty rate increase to your existing SUI rate for persistent filing failures.
Willful evasion goes further. Willfully failing to collect or pay over employment taxes triggers the trust fund recovery penalty under IRC 6672, which equals 100% of the unpaid tax and can be assessed personally against responsible individuals, not just the business entity.5Internal Revenue Service. Employment Tax Penalty, Fraud, and Identity Theft Procedures Civil fraud penalties add 75% of the underpayment attributable to fraud.