Understanding Unemployment Insurance Tax Rates

April 4, 2023 by Wayne Rottger

When a worker loses their job through no fault of their own, they may be eligible to receive unemployment insurance benefits. Unemployment benefits they receive are provided for a limited period of time – up to 26 weeks in most cases – and amount to a certain percentage of the wages they received during employment. These benefits are paid from an account that is funded by employers via a mandatory tax. Understanding how unemployment insurance tax rates are determined and what affects them is one of the crucial tasks for the employers who wish to remain compliant with UI regulations and, at the same time, run their businesses responsibly.

Employers Provide Funding for Unemployment Insurance

The unemployment compensation program in each state is funded mainly by employer taxes. Therefore, in addition to a federal unemployment tax obligation, most employers must pay state unemployment insurance taxes as determined by the state in which they operate.

The business has the unemployment insurance tax liability for an employee if:

  • They worked for the employer, whether full-time or part-time, for 20 weeks or more in a calendar year, or
  • They received wages of $1,500 or more in a calendar quarter. Wages consist of salaries, bonuses, tips, and any other similar benefits.

Only the work subject to UI taxes may earn an employee the right to collect unemployment benefits, and only wages earned in covered employment can be used to calculate an out-of-work employee’s unemployment benefits. There are certain services employees may perform for the employers that are excluded from unemployment taxes, making it impossible for them to collect unemployment benefits for this type of work.

Unemployment Insurance Tax Rates on Federal and State Levels

Federal and state unemployment taxes are the source of funding for the joint federal-state unemployment insurance program. The revenues collected at the federal level go into the Unemployment Trust Fund (UTF) which pays for administration costs of this program at both federal and state levels, including the federal portion of the extended benefits and loans provided to individual state funds. The unemployment taxes collected by states for the State Unemployment Trust Funds provide payments for regular benefits as well as the state portion of the extended benefits.

The Federal Unemployment Tax Act (FUTA) tax has a fixed rate, set at 6% of the federal unemployment tax wage base and applied to the first $7,000 of an employee’s wages. The percentage could end up being significantly lower through timely submission of tax returns and tax payments.  This allows for an offset of up to 5.4% of their FUTA tax, lowering it to 0.6% in total, or $42 per qualifying employee.

SUTA Tax Comes with Rate Variations

Alongside the federal UI taxation such as the FUTA, there is also the State Unemployment Tax Act (SUTA), collected in order to fund all unemployment insurance expenditures in regular times and the majority of unemployment insurance expenditures during the times of crisis, whereas part of the emergency benefit extensions payments comes as the responsibility of the federal government. As a payroll tax, SUTA is generally an employer’s responsibility, but there are exceptions: three states require unemployment tax payments from employees as well. That is the case in Alaska, New Jersey, and Pennsylvania.

Depending on the wages they pay to their employees, employers need to pay a certain amount of UI tax. This amount is determined against the state unemployment taxable wage base in each state. The state taxable wage base may not be lower than the federal taxable wage base of $7,000. But it can be as high as the state legislature will approve. In some states, the wage base is the same as the federal – $7,000. Others have set different amounts, usually higher. As the unemployment tax wage base is defined as the maximum amount of an employee’s gross income that is used to calculate the SUTA tax, this means that there is no obligation to pay the tax on the income that exceeds this wage base.

It is important to note that, even though the unemployment tax wage base is the same for all employees in one state, it could be subject to change on an annual basis. Having this in mind, employers need to follow the updates in the regulatory field to make sure their SUTA calculations are on track and in compliance with valid legislation.

There is another component to a SUTA tax. That is the tax rate set by each state, and it is influenced by various factors. In general, new businesses pay a standard tax rate, and after a certain period, the unemployment insurance tax rates may change based on their experience related to unemployment issues. If their turnover is high, the rate may increase, for instance. However, the single most important factor that may contribute to the company’s experience rating involves their handling of unemployment claims, or the number of former employees who filed for unemployment benefits, especially in relation to the number of successful claims. Employers need to take all necessary steps to avoid overpayments and respond timely to baseless and fraudulent claims, in order to keep their unemployment insurance tax rates low.

Unemployment Insurance Tax Rates Can Be Controlled

Tax obligations are not optional. Their costs, however, could dramatically differ depending on the tax rates an employer gets to pay, based on the number of UI claims filed and approved for their former employees. By reducing the employee turnover rate and preventing the UI benefit charges to their account, as well as through timely tax payments, employers can prevent their unemployment insurance tax rates from going up. Furthermore, outsourcing unemployment claims management is an additional step in the right direction that can make the entire process and costs associated with it easier to handle and control.

Introduce the automated UI solution to help advance your business and make tax rate fluctuations a thing of the past.

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