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Unemployment insurance provides payments to workers who have been let go due to a factor out of their control. In these situations, they can apply to receive unemployment benefits or a percentage of the wages they would have earned if they were still employed. Therefore, paying federal and state unemployment taxes is not optional and employers have to be aware of their responsibilities when it comes to filing or responding to unemployment claims. To do this properly and stay compliant, it is important to understand employers’ UI tax liability as well as the unemployment tax wage base and tax rates in their states.

Unemployment Insurance Tax Liability

Each state operates its own unemployment compensation program that is funded mainly by employer taxes, so most employers must pay state unemployment insurance taxes in addition to any federal unemployment tax they may owe.

Employers are subject to unemployment insurance tax liability if:

If one of these conditions is met, employers are required to pay taxes up to the unemployment tax wage base on each employee’s wages in a calendar year.

For an employee to collect unemployment benefits, the work conducted must be subject to UI taxes for the employer and only wages earned in covered employment can be used to compute an out-of-work employee’s unemployment benefits. Some wages paid to employees performing certain services for an employer are excluded from unemployment taxes, making them ineligible to receive unemployment benefits.

FUTA and SUTA Taxes

Federal and state unemployment taxes fund the joint federal-state unemployment insurance program. Federal unemployment tax revenues fund accounts in the federal Unemployment Trust Fund (UTF) that pay for federal and state unemployment insurance program administration costs, the federal portion of extended benefits and loans to State Unemployment Trust Funds. State unemployment taxes fund State Unemployment Trust Funds, which pay regular benefits and the state portion of extended benefits.

While state tax amounts vary, the Federal Unemployment Tax Act (FUTA) tax is 6% of the federal unemployment tax wage base and it applies to the first $7,000 of an employee’s wages. Employers can receive an offset of up to 5.4% of their FUTA tax when they pay state unemployment taxes on time and also file the applicable tax forms timely. In that case, employers pay 0.6% of the first $7,000 of an employee’s wages, or $42, in FUTA tax per qualifying employee.

SUTA Taxes and Unemployment Tax Wage Base

Taxes under the State Unemployment Tax Act (SUTA) fund all unemployment insurance expenditures in normal times, and the majority of unemployment insurance expenditures during downturns, with the remainder paid in part by the federal government for emergency benefit extensions. While SUTA is generally an employer tax, there are three states that also require employees to pay state unemployment taxes: Alaska, New Jersey, and Pennsylvania.

Employers pay state unemployment insurance contributions based on what they pay their employees, up to a certain state unemployment tax wage base. Some states use the same unemployment tax wage base as the federal wage base of $7,000, others do not. The unemployment tax wage base is the maximum amount of an employee’s gross income that can be used to calculate the SUTA tax. In other words, employers do not pay the tax on any income that exceeds the unemployment tax wage base.

The unemployment tax wage base is the same for all employees in one state. However, each state’s wage base is subject to change each year. Taking this into consideration, it is critical that employers monitor adjustments in this area and ensure they are withholding the correct amount of SUTA tax for each employee.

Another SUTA tax component is the tax rate set by each state. There are multiple factors that can impact this determination. New businesses typically have a standard tax rate, and after a period of time, they will pay a rate based on their historical experience. Also, businesses with a high rate of turnover are likely to pay a higher tax rate. Finally, the number of former employees who file for unemployment contributes to a company’s experience rating that also impacts the SUTA tax rate.

Minimizing Unemployment Taxes

While employers cannot avoid their unemployment tax obligations, there are measures that can help them manage FUTA and SUTA taxes in an effective way. Apart from making an effort to make timely payments, employers can reduce their SUTA tax costs by lowering the rate of employee turnover and reducing the number of former employees who file for unemployment benefits during the calendar year. Also, by automating unemployment claims management and relying on the right electronic solution, employers can easily navigate complicated tax deadlines and fluctuating payments, while reducing the number of costly mistakes.


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