What is Unemployment Insurance (UI) Tax

Unemployment Insurance pays benefits when an employee is terminated under certain circumstances.

Unemployment Insurance (UI) is a federal and state program jointly financed through federal and state employer payroll taxes (federal/state UI tax).   These are forms of Payroll Taxes.

The Federal program is called FUTA (Federal Unemployment Tax Act)Federal Funds covers the costs of administering the Unemployment Insurance and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.

The State program is called SUTA (State Unemployment Tax Act).  State funds are used to pay the actual benefits to laid off employees.

 

Who is required to pay Unemployment Insurance

Generally, employers must pay both state and federal unemployment taxes if: (1) they pay wages to employees totaling $1,500, or more, in any quarter of a calendar year; or, (2) they had at least one employee during any day of a week during 20 weeks in a calendar year, regardless of whether or not the weeks were consecutive.

In three (3) states employees are also required to contribute to the Unemployment Insurance Fund.  These states are Alaska, New Jersey and Pennsylvania.  Employers in these states are required to withhold payment from their employees and make the payment to the state.

Government entities and non-profit organizations are not liable under FUTA but are covered by the states. 

 

What are the Federal UI Tax Rates

The FUTA (Federal Unemployment Tax Act) tax rate is 6.2% of taxable wages. The taxable wage base is the first $7,000 paid in wages to each employee during a calendar year.

Employers who pay the state unemployment tax, on a timely basis, will receive an offset credit of up to 5.4% regardless of the rate of tax they pay the state. Therefore, the net federal tax rate is generally 0.8% (6.2% - 5.4%). This would equate to a maximum of $56.00 per employee, per year (.008 X $7,000. = $56.00) in federal tax.

 

What are the States UI Tax Rates

The UI tax rate varies from state to state.  States have a UI tax rate for new employers and experienced employers. 

A new employer could be a small business that just started hiring, a company that takes over another business in the state or an out-of-state business that started operating in the state.

New Employers pay a fixed UI rate for 1-3 years.  Experienced employers may pay a lower or higher rate depending on their history of involuntary termination of employees.  The less involuntary termination, the lower the rate and vice versa.

Note:  In addition to UI taxes some states also require payment for Disability Insurance (DI) & Work Force Development/Supplemental Workforce Fund (WF/SWF), Family Leave Insurance (FLI)

The taxable wage for states range from $7,000 to $38,200.

You can find the specific state UI rates by clicking on this link.

 

Domestic Employers

What is a Domestic Employee:  A domestic (or household) worker is an employee who performs domestic services in a private home. Examples of household employees are: babysitters, caretakers, cleaning people, drivers, nannies, health aides, yard workers and private nurses.

What Coverage Must Employers Provide:  Employers of domestic employees must pay state and federal unemployment taxes if they pay cash wages to household workers totaling $1,000, or more, in any calendar quarter of the current or preceding year.

 

Employers of Agricultural Employees

Employers must pay federal unemployment taxes if: (1) they pay cash wages to employees of $20,000, or more, in any calendar quarter; or, (2) in each of 20 different calendar weeks in the current or preceding calendar year, there was at least 1 day in which they had 10 or more employees performing service in agricultural labor. The 20 weeks do not have to be consecutive weeks, nor must they be the same 10 employees, nor must all employees be working at the same time of the day.

Generally, agricultural employers are also subject to state unemployment taxes, and employers should contact their state workforce agencies to learn the exact requirements. 

 

How to File and Pay Federal UI Tax

The Federal Unemployment Tax Act (FUTA), authorizes the Internal Revenue Service to collect a federal employer tax used to fund state workforce agencies. Employers pay this tax annually by filing IRS Form 940    (see FUTA rates).

 

How to File and Pay State UI Tax

UI tax payments to the states are made quarterly. 

Some States have an online filing system while others do not. 

Before you can file and pay State UI taxes you must first register and apply for a state UI Account number.

Nonprofit organizations and government entities may elect to reimburse the Unemployment Insurance Trust Fund for all benefits paid to their former employees on a dollar for dollar basis.