When an employee becomes unemployed at no fault of their own, that worker can receive a small amount of money to help them make ends meet during unemployment. That money comes from unemployment insurance. Unemployment insurance is funded by payroll taxes.
Unemployment insurance is something you should have a basic understanding of as a business owner. So, what is unemployment insurance and how does it affect your small business?
Unemployment insurance meaning
Federal and state governments jointly run unemployment insurance. Each state runs its own unemployment insurance program. The federal government oversees each state program. Unemployment insurance provides monetary benefits for eligible unemployed workers. The workers must be unemployed at no fault of their own. For example, a worker who was laid off might be eligible for unemployment benefits.
Many unemployed workers are not eligible for unemployment insurance benefits. For example, workers who quit their job, recent college graduates who are looking for work, or people who choose not to work may not be eligible for unemployment benefits.
Workers who receive unemployment insurance benefits will get a percentage of the wages they would have earned if they were still employed.
Each state sets its own rules for unemployment insurance. There are variations of who is eligible for benefits, how long a worker can receive benefits, and how much the worker can receive. A common question from employers is—do employers have to pay unemployment taxes? While it’s not a direct payment to an employee, employers do have to pay taxes on the federal and state levels that will cover qualified unemployed workers.
The federal government uses the Federal Unemployment Tax Act (FUTA) tax, an employer-only tax, to fund oversight of state unemployment programs.
FUTA tax is 6% on the first $7,000 each employee earns per calendar year. That means the maximum amount you will have to pay per employee is $420 per year ($7,000 × 0.06).
You might qualify for a tax credit up to 5.4%. If you qualify for the maximum credit, your FUTA tax rate would be 0.6%. Your total FUTA liability would be $42 per employee each year ($7,000 × 0.006).
You will file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. Form 940 details your FUTA tax for the year. The 940 Schedule A attachment can help residents figure out their FUTA rate. The form is due by January 31 each year.
States use a State Unemployment Tax Act (SUTA) tax, a predominantly employer paid tax, to fund unemployment benefits. States use multiple terms to refer to SUTA, including state unemployment insurance (SUI) and reemployment tax.
Each state sets its own SUTA tax rates. Your state will assign you the rate you should use. Your state will determine your rating based on your experience and industry.
Each state also sets its own wage base. The wage base is the maximum amount of wages per employee to which SUTA applies. For example, if a state’s wage base is $10,000, you will only withhold SUTA from the first $10,000 you pay the employee.
Don’t worry about FUTA and SUTA. Patriot’s Full Service Payroll software will take care of unemployment taxes for you. The software will calculate how much you owe and remit the taxes for you. Get a free trial now!
This article has been updated from its original publication date of October 28, 2016.This is not intended as legal advice; for more information, please click here.