The choice to terminate an employee is always a difficult decision. That difficulty is only compounded by the fact that many terminated workers are eligible for unemployment benefits.
Understanding unemployment insurance benefits — including the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) — can help you plan for what happens next.
This article explores how unemployment insurance works, who pays for it, and employers’ responsibilities. We’ll also share how Mosey can help you maintain business compliance.
What Is Unemployment Insurance?
Unemployment insurance (UI) is a federal-state program designed to provide temporary financial assistance to eligible unemployed workers. The U.S. Department of Labor oversees the program, but it’s administered at the state level.
Unemployment benefits include wage replacement for individuals who have lost their jobs through no fault of their own, such as layoffs or seasonal work ending. Workers must meet specific eligibility requirements, including being able to work, actively seeking new employment, and earning a minimum amount of wages during a “base period.”
This program is vital for unemployed workers, providing them with weekly benefit payments to help bridge the gap while they search for their next opportunity. Employers play a key role in funding the system, ensuring financial support is available when employees need it most.
How Do Employees Collect Unemployment Assistance?
Employees who find themselves out of work may qualify for unemployment assistance to help cover their basic expenses while they search for a new job.
Unemployment assistance is funded primarily by employer tax contributions, such as state unemployment insurance (SUI) tax and federal unemployment insurance taxes (UI tax). Employers pay these taxes to create a trust fund that supports eligible unemployed workers. Most full-time workers are eligible, and in some cases, part-time employees may qualify.
To begin collecting UI benefits, an individual needs to file a claim with their state’s unemployment agency.
The application typically requires details about the claimant’s former employment, including the dates of employment, the reason for separation, and the weekly wages earned. The state will then evaluate whether the individual meets the eligibility requirements.
Once approved, the claimant will start receiving a weekly benefit amount, calculated based on their prior earnings and capped by state limits. Payments are often issued electronically or via mailed checks. To continue receiving assistance, the claimant must actively search for work and report any earnings from part-time or temporary jobs.
Employers should know that frequent unemployment claims can impact their SUI tax rate. By maintaining accurate employee records and contesting ineligible claims when necessary, businesses can better manage their UI tax obligations while ensuring the program benefits those who truly need it.
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Who Pays for Unemployment Benefits?
With a few exceptions, unemployment insurance is funded entirely by employers.
Here’s how it works:
Federal Unemployment Tax Act (FUTA)
The FUTA tax rate is 6% of the first $7,000 of wages paid to each employee annually — this is known as the FUTA wage base. Employers may qualify for a federal tax credit of up to 5.4%, reducing their FUTA tax rate to 0.6% if they pay their state unemployment taxes (SUTA) on time.
State Unemployment Tax Act (SUTA)
SUTA taxes vary significantly by state. States individually determine their tax rates and wage bases, which can depend on the employer’s industry, size, and experience rating (i.e., how many unemployment claims have been filed against them).
Notably, Alaska, New Jersey, and Pennsylvania make employers and employees contribute to SUTA. While employers fund most forms of unemployment compensation, employees in these states receive a small deduction for unemployment insurance on every paycheck.
What Are an Employer’s Responsibilities for Managing Unemployment?
Employers are responsible for funding unemployment insurance programs and managing the associated processes.
Here’s how:
Paying FUTA and SUTA Taxes
Employers must calculate and pay their FUTA and SUTA taxes regularly, usually each calendar quarter. Failure to pay these taxes on time can result in penalties and loss of FUTA tax credit.
Responding to Unemployment Claims
When former employees file for unemployment benefits, state unemployment agencies will contact employers to verify employment dates, the reason for termination (e.g., layoffs, termination, or resignation), and compensation details.
Employers must respond promptly to these notices. Failure to provide accurate and timely information can lead to benefit overpayments or increased tax rates.
Contesting Unemployment Claims
If an employer believes a former employee does not meet the eligibility criteria for unemployment benefits, they can contest the claim.
For example, if an employee was terminated for misconduct or quit without good cause, the employer can present documentation to support their case.
Auditing Benefit Charges
Regularly auditing benefit charges helps employers identify and contest improper charges, such as overpayments or unemployment fraud. The U.S. Department of Labor’s Benefit Accuracy Measurement (BAM) program has shown that errors are common, and correcting these errors can save employers money.
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What Affects an Employer’s Unemployment Tax Rate?
Unemployment benefits are funded through payroll taxes that employers pay into the state and federal governments’ trust funds.
The tax rate an employer pays depends on several factors:
Experience Rating
Employers with fewer layoffs typically have lower tax rates since they’ve had fewer unemployment claims filed against them. This works like any other insurance system — for example, you likely pay lower auto insurance rates if you’ve never had an accident.
Amount of Wages
Taxes are calculated based on the wage base in each state. For example, if the wage base is $10,000 and an employer’s tax rate is 2%, the employer pays $200 per employee annually.
State-Specific Factors
States like Alaska, New Jersey, and Pennsylvania require employee contributions, slightly reducing the burden on employers.
Employers should be aware that while one unemployment claim may not have an immediate financial impact, repeated claims can increase their SUTA tax rate over time. It’s important to be sparing with layoffs, as they can have a cumulative effect.
How To Reduce Unemployment Insurance Costs
Unemployment insurance can be expensive, and most organizations attempting to grow are also extremely cost-conscious. Luckily, there are several strategies employers can use to manage, and potentially reduce, their unemployment insurance costs.
Avoid Layoffs When Possible
Reducing layoffs is the most effective way to maintain a lower experience rating and SUTA tax rate. Consider alternatives like reducing hours or implementing furloughs during slow periods.
Conduct Benefit Audits
Auditing unemployment benefit charges can help identify overpayments or errors. Correcting these mistakes can prevent unnecessary increases in SUTA tax rates.
Maintain Accurate Records
Keep detailed employee files, including dates of employment, wages, and reasons for separation. This information is essential when responding to unemployment claims or contesting incorrect benefit charges.
Respond Promptly to Claims
Timely responses to unemployment claims can prevent improper charges and demonstrate compliance with state requirements.
Classify Workers Correctly
Ensure that independent contractors are correctly classified, as they are not eligible for unemployment benefits. Misclassification can result in penalties and retroactive taxes.
What Are Some FAQs About Unemployment Insurance?
If your organization is new to handling unemployment claims, there may be a few areas that need more clarity:
Can Employers Deny an Unemployment Claim?
Employers can contest unemployment claims if they believe the employee does not meet eligibility criteria. However, the final decision lies with the state unemployment agency, which evaluates evidence from both sides of the claim.
Do Fired Employees Qualify for Unemployment?
Terminated employees who were fired for misconduct, such as theft, harassment, or criminal activity, are likely ineligible for unemployment benefits.
What Happens if Overpayments Occur?
If unemployment benefits are overpaid, employers may receive a credit to their unemployment tax account. Overpayments often result from incorrect wage information or errors in claim processing. It’s better to double-check for accuracy than to correct an error you discovered late.
What Happens if an Employee Commits Unemployment Fraud?
Committing unemployment fraud can result in significant consequences. Penalties may include reimbursing the fraudulently obtained benefits, additional fines, criminal prosecution, disqualification from future unemployment benefits, and, in severe cases, imprisonment.
Stay Compliant With Mosey
Managing unemployment insurance is an important responsibility that involves overlapping state and federal requirements. Employers can maintain compliance with FUTA and SUTA tax rates by researching the law and following the best practices described above.
If that sounds daunting, don’t worry — Mosey can help with payroll compliance. Our compliance platform allows multi-state employers to automate registration for payroll tax accounts everywhere they have employees and manage obligations in each location easily. Schedule a demo with Mosey to learn how we can streamline compliance for your organization.
