When an employee loses their job and their stream of income, they might be eligible to collect unemployment insurance. Unemployment benefits provide temporary financial relief to workers who lost their jobs through no fault of their own. But who pays for unemployment? Do employers pay unemployment, or is it the employee or a government agency? In most cases, the party responsible for funding unemployment programs is the employer.
Navigating unemployment can be complex, especially without the help of an unemployment expert or service provider. In this guide, you will discover how unemployment works, who pays for unemployment and answers to frequently asked questions.
How Does Unemployment Insurance Work?
Unemployment insurance provides cash benefits to eligible workers who lost their jobs through no fault of their own, such as being laid off. Unemployment insurance is a joint federal-state program administered by the U.S. Department of Labor and each state. Unemployment benefits typically come in weekly payments but can vary by state.
Eligible employees can receive unemployment benefits for up to 26 weeks a year, which can be increased in certain scenarios, such as periods of high unemployment like the COVID-19 pandemic. Two primary pieces of legislation regulate unemployment insurance: The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA). Together, these two laws ensure eligible employees who are out of work can receive cash benefits that replace a certain percentage of their wages.
For employees, it’s their responsibility to file for unemployment benefits with their state agency. It’s recommended for employees to file as soon as they become unemployed, as it can take several weeks for their application to process and for their first payment to arrive.
Who Pays for Unemployment Benefits?
So, who pays for unemployment benefits? In most cases, employers are responsible for paying unemployment benefits. Let’s take a closer look at who’s responsible for paying unemployment benefits and how payments work on the state and federal levels.
The Main Contributors
The main contributors to funding federal and state unemployment programs are employers. In all states, employers are required to pay FUTA and SUTA taxes. There are a few state-specific exceptions where employees help contribute, outlined in the following section.
State-Specific Exceptions
While employers are primarily responsible for paying for unemployment benefits, there are a few state-specific exceptions. The following states require employers and employees to pay unemployment taxes: Alaska, New Jersey and Pennsylvania. If you’re an employer operating in one of these three states, it will be your responsibility to withhold SUTA taxes from each employee’s paycheck.
Crunching the Numbers
As mentioned, the Federal Unemployment Tax Act and State Unemployment Tax Act are the two pieces of legislation regulating the federal and state unemployment programs. How do employers pay for unemployment? Let’s look at the key provisions of these two laws, including their tax rates, credit reduction and more.
FUTA regulates the federal unemployment benefits system and imposes taxes on employers to provide unemployment benefits to eligible workers. Employers are required to pay FUTA taxes based on a percentage of the first $7,000 of each employee’s annual earnings. The standard FUTA tax rate is 6 percent. However, employers who pay SUTA taxes on time and in full can receive a credit of up to 5.4 percent, meaning their FUTA tax obligations are lowered to 0.6 percent.
SUTA refers to state-specific unemployment taxes, and each state has its own eligibility criteria, benefit amounts and the length of time for which state unemployment benefits can be paid. Additionally, SUTA tax rates vary by state. An eligible claimant may receive unemployment benefits from the state’s trust fund in which they originally filed and the amount paid out is charged to all employers who paid wages to the claimant over a specific historical time period.
State workforce agencies collect SUTA taxes each quarter. All employers doing business in a state must report the wages paid to their employees and many pay a tax on those wages based on an assigned annual unemployment tax rate. The exception to this is a non-profit or governmental employer. This type of employer has an option to either pay taxes based on an annual tax rate or repay dollar for dollar, any benefits paid to former employees. The amount of earnings an employer has to pay taxes on is determined by each state but can be no lower than the federal taxable wage base, which is currently $7,000. So for example, Employer A must pay tax on the first $7,000 each of its employees earns in a given quarter. Once that wage threshold has been met, no additional taxes are due for that employee until the next calendar year. An employer’s tax rate is very sensitive to the factors that make it up but in general, is very sensitive to the amount of benefits paid out to former employees. The more benefits paid, the more likelihood the employer will earn a higher tax rate. .
Employers’ Responsibilities in Unemployment Management
One of the primary responsibilities of all businesses is managing unemployment claims and the associated tax risk. Navigating the complex environment of unemployment can be challenging, which is why working with an unemployment expert is often advised. Some of the top employer responsibilities include:
- Paying unemployment taxes: Employers are responsible for paying FUTA and SUTA taxes on time and in full. Failure to do so can result in penalties and fines.
- Registering with state workforce agencies: Employers must register with state workforce agencies (SWAs) and obtain an employer identification number (EIN). Employers must report to their respective SWA, who collect information like the employee’s wages, hours and reason for separation.
- Understanding state-specific requirements: Each state has its own criteria and requirements for its unemployment programs. It’s up to employers to understand what’s required of them in each state they operate in, such as tax rates and wage bases.
Beyond Taxes
There’s more to unemployment insurance than taxes. Employers have many responsibilities when managing unemployment claims, such as responding to notices, preparing for appeals hearinjgs and auditing benefit charges. Let’s explore each of these components in detail below.
Responding to Unemployment Claims
Employers must respond promptly to unemployment claims that are filed by their former employees. When an employee files for unemployment, the applicable state workforce agency will contact the employer and request information, such as:
- Salary or wage information
- Dates of employment
- Employment status, such as full-time, part-time or seasonal
- Reason for separation
- Details of the separation
- Supporting documents of misconduct
- Severance pay provided
As an employer, it’s crucial to maintain accurate records to ensure you have supporting evidence to win unemployment claims. Having these documents on hand ensures you remain compliant and provide accurate information to state and federal unemployment agencies.
Appealing Unemployment Claims
In order for an employee to be eligible to receive unemployment claims, they must meet certain requirements, such as:
- Losing employment due to circumstances deemed out of their control, such as a layoff, furlough or seasonal work ending.
- Quitting for a change in the contract of hire, such as changing the shift which an employee works or reducing their agreed upon rate of pay.
- Meeting state-specific requirements for time worked, wages earned and being available and actively searching for work.
Employers can appeal the unemployment claim if employees fail to meet these requirements. In order to successfully win an appeal, employers must have substantial documentation that proves their cases, such as evidence that supports misconduct. Unemployment hearings can be time-consuming and emotional. Having an expert on your side, like Experian Employer Services, can help ensure a strong case is presented with more favorable outcomes.
Unemployment Benefit Charge Audits
Another key responsibility of employers when managing unemployment claims is conducting regular benefit charge audits, which can help save costs and reduce erroneous payments. Through regular audits, employers can match employee claims to their internal records to spot discrepancies, like overpayments, to receive credits that return to their unemployment account. SWAs send notices of benefits charged on a variety of time frames, such as weekly, monthly, quarterly or annually. Like claim documents, the benefit charge statement also has a protest deadline so adherence to and awareness of this is crucial to lowering an employer’s unemployment tax rate.
The Cost of Unemployment Claims
Unemployment claims can be costly to employers, impacting their bottom line. Take a look at information on the state unemployment insurance (SUI) tax rate and the impact unemployment claims can have on tax rates.
Unpacking the SUI Tax Rate
The SUI tax rate for employers depends on several factors, such as the size of their workforce, how much they contribute to state unemployment taxes and the number of filed unemployment claims. Each employer can have a different tax rate depending on these factors.
Impact on Tax Rates
One of the top factors influencing an employer’s tax rate is the number of unemployment claims filed by previous employees. The more unemployment claims an employer has, the higher their SUI tax rate might rise. This is because funds from state unemployment insurance programs are used to pay unemployment benefits, and companies with higher claims need to contribute more to the fund.
Strategies to Lower Unemployment Insurance Costs
Unemployment insurance costs can significantly impact a company’s bottom line. However, several strategies can help lower these costs, such as:
Mitigating Layoffs
Businesses with a high number of unemployment claims often have their tax rate increased, costing them more money. One way to avoid this is by mitigating layoffs. All states have an experience rating system that they use to calculate an employer’s SUI tax rate, and by reducing layoffs, employers can enjoy a more favorable experience rating and tax rate.
Benefits Charges and Wage Audits
The more benefits charged against your unemployment account, the higher your SUI tax rate tends to be. Benefit charges are one component used when calculating your experience rating, and through wage audits, you can assess the reported wages used to determine your benefit ratio and tax rate.
Work With an Unemployment Compliance Expert
Having an unemployment compliance expert by your side can help you lower unemployment insurance costs in a variety of ways. Through effective unemployment management with Experian Employer Services, you can recover overpayments, receive complete hearings representation and remain compliant with regulatory changes to prevent penalties and fees.