What Does an Employer Pay Off for Unemployment?
Updated : September 15th, 2012
The amount that an employer shells out for unemployment will depend on the sum of his payroll, his track record in keeping employees and the rates that are specific to his state. Besides, all employers should pay a federal unemployment tax that the Internal Revenue Service (IRS) funnels back to the states to help pay administrative costs for unemployment programs.
How much is a Claim going to Cost Employers?
Most employers are legally responsible to pay premiums into the trust fund on the first $7000 paid to each employee in the calendar year. Premium rates for new non-governmental employers are based on the experience of their industry grouping, if the industry grouping has an extremely high benefit payout. All other new employers are allotted a 2.7% new employer premium rate. In the past, mining and construction are the only industries with new employer rates higher than 2.7%.
Employers responsible for premiums for three consecutive calendar years as of December 31 have rates based on their skill. Premium rates vary from 0.0% to 10% for non-governmental employers and from 0.3% to 3% for governmental employers. Local and state governments and certain nonprofit employers have the choice of paying premiums or repaying the trust fund for their share of benefits paid to the former employees.
Employer Liability for Unemployment Taxes
In order to fund unemployment compensation benefit programs, employers are subject to federal and state unemployment taxes depending on several factors. These factors include the sums employers pay their employees, the unemployment claims filed against the business, and the type & age of the business.
Employers must pay federal and state unemployment taxes so as to fund the unemployment tax system. Unemployment compensation is intended to pay benefits to workers when they are laid off through no fault of their own.
The Federal Unemployment Tax Act (FUTA) imposes a payroll tax on employers, depending on the wages they pay to their employees. Unlike some other payroll taxes, the business itself has to pay the FUTA tax. You do not hold back the FUTA tax from an employee’s wages.
Your business has to pay the FUTA tax if during the current or the previous calendar year you meet any of the following tests:
- You pay wages totaling at least $1,500 to your employees in any calendar quarter; or
- You have at least one employee on any given day in each of 20 different calendar weeks
Once you fulfill either of the tests, you become liable for the FUTA tax for the whole calendar year and for the next calendar year as well.
Computing the Tax
The FUTA tax is imposed at a single flat rate on the first $7,000 of wages that you give each employee. Once an employee’s wages for the calendar year go beyond $7000, you have no additional FUTA liability for that employee for the year.
Credit for State Unemployment Taxes
You can usually claim credits against your gross FUTA tax to reflect the state unemployment taxes you pay. If you paid all your state unemployment taxes on time, and prior to the due date of your FUTA tax return, you will be permitted to claim a credit equal to 5.4% of your federally taxable wages. This will in effect reduce the FUTA tax to 0.6%.
Unlike state unemployment tax rates, your federal unemployment tax rate does not reduce if you do not dismiss workers. However you will save money on federal unemployment tax if you have fewer employees with higher earnings rather than a greater number of employees each earning less money.
State Unemployment Tax Employer Liability
Similar to how the federal UC program is funded; in order to fund each state’s unemployment compensation program almost all the states impose unemployment taxes directly on employers. Also similar to the federal system is the fact that apart from a few states, you do not withhold these taxes from your employees’ wages.
If you have employees in New Jersey, Alaska, or Pennsylvania you will also be withholding unemployment taxes from your employees’ wages since these states assess unemployment taxes on employees.
State Tax Rate
Your state unemployment tax rate is based on your history as an employer. When you first open your UI account, your tax rate will be fairly high because you have no track record. If you work for several years without laying off an employee, your tax rate will go down. If you continually lay off employees, your tax rate will increase.
Are you Liable for Your State’s Unemployment Taxes?
In nearly all states, if you are subject to the federal unemployment tax, you are automatically accountable for the state unemployment tax. In the remaining states, broader tests are applied for taxability. It means that if you have employees in the states with the broader tests for taxability, you may finish up paying state unemployment taxes even if you are not obliged to pay the federal ax.
Computing Your State Unemployment Tax Liability
Computing what you owe in state unemployment taxes is just a matter of multiplying the wages you pay each of your employees by your tax rate. However, each state confine the tax you have to pay with respect to any one employee by detailing a maximum wage amount to which the tax applies. Once an employee’s wages for the calendar year surpass that maximum amount, your state tax liability with respect to that employee ends.
The sum that you pay in the unemployment tax depends on the total sum of your payroll. Both federal and state unemployment taxes are computed as percentages, so higher gross payroll will convert to a higher unemployment premium even if your tax rate is low. However, wages subject to federal unemployment taxes are limited at $7000 per employee, so federal unemployment tax depends less on the wages paid to each employee.
How It Works
If you are laid off due to conditions that are not your fault, you are entitled for state unemployment benefits. You are qualified to obtain unemployment if your employer lays you off due to lack of work, but you are not allowed if you simply do not feel like getting up and going to work unless you have a medical condition that makes it difficult to do so. Your employer does not directly pay the unemployment benefits that you receive, but he will pay a higher unemployment tax rate because you have made a claim against his account.