What is unemployment insurance?
Unemployment Insurance is a joint state (State Unemployment Tax Act or SUTA) and federal program (Federal Unemployment Tax Act or FUTA) that provides cash benefits to eligible workers. Each state has its own unemployment insurance program, but they all follow the same general guidelines established by federal law.
The purpose of unemployment insurance payments is to provide temporary financial assistance to people who are unemployed through no fault of their own. The benefits are intended to provide compensation to aid the worker while they are seeking new employment.
In general the benefits are based on a percentage of an employee’s earnings over a 52 week period. Each state has its own requirements for eligibility, the benefits amount and the length of time the benefit can be received. To illustrate, here are examples of current maximum weekly benefit amounts and durations for a handful of states:
- Georgia: $330 for up to 20 weeks
- Illinois: $458 for up to 26 weeks
- Maryland: $430 for up to 26 weeks
- North Carolina: $350 for up to 20 weeks
- Pennsylvania: $573 per week for up to 26 weeks
- Virginia: $378 per week for up to 26 weeks
How the Federal Unemployment Tax Act (FUTA) Works with SUTA
Under FUTA, there is a federal tax rate of 6% on the first $7000 of wages which are subject to this tax. Once an employee’s year-to-date wages exceed $7000 an employer stops paying FUTA for that employee.
An employer can take a credit of up to 5.4% of taxable income if it pays state unemployment taxes on the wages. This amount is deducted from the amount of federal unemployment taxes that the organization submits, so the net amount deposited to the Internal Revenue Services is typically 0.6% of wages. In certain states, some types of compensation, including wages paid to corporate officers and some fringe benefits are excluded from state unemployment tax. Those wages are subject to the full 6% FUTA rate.
How State Unemployment Tax Rates are Determined
As for the SUTA or SUI, as mentioned earlier, each state has its own parameters. Most employers are required to pay the entire unemployment tax rate, however there are a few states that require employees to contribute (currently AK, NJ and PA). Employers can contact their state Unemployment Office to determine the regulations for their specific state, or if there is a question about their SUI tax rate. The state Unemployment Office typically will notify the employer by mail toward year-end to establish the SUI rate for the following year.
A company’s SUI rate is usually based on an experience rating system, which is determined from the number of claims that were granted to former employees and how much was paid out. An employer does not pay the claims directly to the employee. Generally the claims are paid from a state-sponsored fund administered by its state unemployment agency. If the state does not have enough funds to pay unemployment benefits to its residents, they may borrow from the federal unemployment trust fund. When a state has outstanding loan balances for 2 consecutive years, the FUTA credit rate for employers in that state will be reduced below the 5.4% federal credit until the loan is repaid; in these cases employers must pay additional unemployment tax.
Since new businesses do not have a track record of unemployment claims, they may have to pay tax at a fixed rate until they have contributed to the state’s unemployment compensation program for a specific period of time, usually one to three years. Once the employers have established an unemployment track record, the states notify them of their SUI rate.
The State Unemployment Wage Base
In addition to the unemployment tax rate, each state sets its own taxable wage base. This is the maximum amount of wages per employee on which the unemployment tax rate can be applied each year. The taxable wage base is the same for all employers in the state, but can be changed by the state each year. According to the American Payroll Association, the 2018 wages bases for the states cited about range from a low of $8,000 for Virginia, to a high of $23,500 for North Carolina.
For example, rates in Georgia range from 0.04% to 8.1% on a wage base of $9,500. A new Georgia employer will pay 2.7% of the wage base in 2018 for a maximum of $256.50 per employee.
Next, we will cover what factors impact whether an employee is eligible or ineligible to receive unemployment benefits. Later, we will examine what employers can do to positively impact their SUI rate.
For more background on Unemployment Insurance, check out the HR Support Center.