Unemployment Taxes – What You Need to Know

Throughout the life of a business, there are many different types of taxes that must be paid. If the business is paying employees for their services, unemployment taxes are one of those taxes. Unemployment taxes can easily be overlooked since they are not something ordinarily broken down as a line item on a paycheck stub. Yet unemployment taxes are every bit as important as any other, since it is a violation of state law if an employer fails to pay them. Failing to remit the appropriate unemployment taxes can result in penalties for the employer and delays in former employees receiving unemployment benefits if too little was paid into the unemployment fund by the employer.

How Unemployment Works

Unemployment taxes are designed to fund programs that provide a minimum amount of compensation to out-of-work individuals who are unemployed through no fault of their own. For example, a company may reach a point that they are downsizing and need to initiate layoffs. If an employee is fired for absenteeism, poor performance, or other infraction, they are usually eligible for unemployment benefits, unless they were fired for a really egregious act. Generally speaking, if an employee voluntarily resigns, they will not be eligible for unemployment benefits. Unemployment taxes are usually 100% paid by an employer and fund an unemployment insurance program administered by the state in which the employee works. If an employee finds themselves unemployed, he or she can apply for unemployment assistance through the appropriate state workforce agency to receive a portion of their previous income until they land their next job. There are two types of unemployment taxes that employers are responsible for collecting and remitting — Federal Unemployment tax (FUTA) and State Unemployment tax (SUTA).

Federal Unemployment Tax

FUTA tax is overseen by the United States Department of Labor and is paid by all businesses nationwide, if one of the following criteria are met:

  • The employer paid wages of $1,500 or more in a calendar quarter; or
  • There were one (1) or more employees for at least part of the day in any twenty (20) or more different weeks in the year.

The FUTA tax rate is a flat 6% for all businesses and is taxed on the first $7,000 in wages earned by an employee. Payments are remitted to the IRS on a quarterly basis if the liability has reached over $500 for that quarter. Form 940 is filed with the IRS at the end of each year to reconcile those payments. There are some types of organizations that may be exempt from paying this tax such as government or educational entities, as well as certain 501(c)3 charitable and religious entities if they qualify under certain IRS rules.

State Unemployment Tax

SUTA taxes are a little more involved, especially if you have employees that work in multiple states. For a majority of states, unemployment tax is paid only by the employer and no deductions are taken out of an employee’s paycheck. However, in the states of Alaska, New Jersey and Pennsylvania, a small portion is taken out of the employee’s paycheck and remitted along with the employer portion. It is important for the employer’s Human Resource and Payroll departments to be mindful of the states in which its company employees are working. For example, if an employer has a headquarters in Virginia and they hire an employee who lives in Pennsylvania and this person will continue to work full-time from their home, the employer must register for an Unemployment account to file and pay those taxes to Pennsylvania. To make matters more complicated, there is no uniform SUTA rate or wage limit to use across all the states. One state might start the employer at a rate of 2% for the first $8,000 in wages earned and another state might start at 2.5% for the first $13,000 in wages earned.

Upon registering for a state’s Unemployment Tax, the employer will be given a standard new rate. Then, usually on a yearly basis, the employer rate will be adjusted. The rate can go up or down depending on a couple different factors, the main ones being the type of industry your company is part of, how long your company has been in business, and how many previous employees were paid benefits. If an employer has paid out several unemployment claims, the tax rate may go up to compensate for those extra payments to out-of-work former employees. If the employer does not pay out very many claims (or none at all), the tax rate should be reduced to reward the lower claim history. In addition to keeping claims lower, other key things to remember to help reduce the rate is to make sure to apply for the accounts as soon as an employee is hired in another state and be sure to file and pay the necessary taxes by the due date. An online account can be established with each state that allows reports to be filed and taxes paid without the need to send anything through the mail.

Getting help with Unemployment Taxes

Keeping track of all the different state unemployment tax rates and changes can be confusing and time consuming. Hiring an outside firm to help monitor, file, and remit these taxes on behalf of your company is one solution that will allow you to focus on the core needs of your business instead of unemployment taxes. As a Professional Employer Organization (“PEO”), C2 routinely assists clients with setting up and paying these taxes. By choosing to be a PEO client, the employer’s information will be placed under the unemployment rate of the PEO when reporting and filing unemployment taxes. All the client’s employees will be reported under the name and account number of the PEO – thereby removing a big administrative burden from the client’s shoulders.

In Summary

Unemployment taxes fund a necessary pool of resources for out-of-work employees. However, handling the administrative burden of accurately collecting and remitting the unemployment taxes to the appropriate state taxing authorities can be daunting, especially for small to mid-size employers who have employees working in different states. For each new employee hired, the employer will need to pay into the wage base for each person in the state where that employee works. Fortunately, PEO’s such as C2 provide expert assistance on collecting and remitting unemployment taxes. So there is no need to struggle with solutions to this problem. C2 can free up the time that an employers’ staff would normally spend, and allow them to focus on more productive tasks that will expand the business.

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.