Business Owners Guide to Unemployment Tax Rates

Unemployment Tax Rates

If you own a business, you’re definitely familiar with paying state and federal unemployment tax. Depending on your business location and history, your state and federal unemployment tax rates approach 10%  of your total payroll cost. But few business owners really understand how these rates are calculated. This guide covers the basics of SUI and FUTA unemployment tax rates, including how they are calculated, how unemployment claims are awarded, and what you can do to minimize your unemployment tax rates.

What is SUI?

SUI stands for State Unemployment Insurance, and many people call it SUTA, which stands for State Unemployment Tax Act. It applies to almost all employers, and employees don’t contribute in most states.

When an employee loses employment, they may be eligible to collect an employment benefit. This benefit is intended to help employees transition between employers. It provides them with some partial wage replacement for a limited time. 

What is a Wage Base?

SUI rates are usually calculated as a percentage of a wage base. The concept of a wage base can be a little confusing so let’s use an example to illustrate.

In Georgia, the wage base is $9,500. Let’s say your SUI rate is 2.7%, so you would pay 2.7% on the first $9,500 you pay to each employee in the tax year. The wage base set to that you don’t get penalized for highly compensated employees. You pay taxes on the first $9,500 in wages for each employee.

Now, $9,500 is the wage base of Georgia. Each state sets its own wage base. Most of them are between probably $7,000 and $15,000, but some states like Washington have a much higher wage base. 

Who Pays for Unemployment Benefits

Many employers believe they pay directly for unemployment claims, but this is not true. Unemployment works like an insurance program, so claims are paid out by the state fund and not the employer directly. However, claims can affect the employer’s unemployment tax rates. Your SUI tax rates vary based on many factors, and how many employees have collected unemployment is a big factor. This is called your experience factor, but some other factors come into play when your state sets your SUI rate.

What is FUI?

FUI stands for Federal Unemployment Insurance. It’s often called FUTA, which is the Federal Unemployment Tax Act. These two terms are interchangeable for this federal program. 

FUTA applies to almost all employers.  The revenue from FUTA is not used to pay out claims directly; and rather, it’s used to supplement the state funds. If your state experienced a higher volume of unemployment claims than it was anticipating, or it doesn’t have the revenue to cover unemployment insurance claims, then it can get some additional funding from the Federal Unemployment Insurance System.

During periods of high unemployment or recessions, the federal government may extend unemployment benefits. In most states, benefits last for about 26 weeks. But during periods of high unemployment, for example, during the COVID-19 crisis, the federal government will use FUI funds to increase the number of weeks a claimant can receive unemployment benefit payments. 

Federal Unemployment Tax Rates

Do I Have to Pay Federal Unemployment Tax?

FUTA has a set rate. It does not fluctuate based on your experience, like state unemployment insurance tax rates. The set rate is 6% of the first $7,000 earned by each employee each year. But that number is deceiving because most employers get a credit for the amount they pay towards SUTA against their FUTA rates.

You can generally take a credit against your federal unemployment tax rate for the amount you pay to the state system. The credit can be as much as 5.4% of FUTA taxable wages. If you’re entitled to the maximum credit, your rate will only be 0.6% of that $7,000 wage base, or $42 per employee per year. Employers are eligible for this credit if they pay SUI taxes on time and fully in a state with not accepted FUTA funds from the federal government. Consult a tax professional for more information.

How Is My State Unemployment Tax Rate Set?

When you start your business, you get a new business rate that varies by state and sometimes by industry. This rate lasts for 1-3 years.

In New York, the new business rate is 4.1% on the first $10,300 in wages. In California, it’s 3.4% on the first $7,000 in wages. And in Georgia, it’s 2.7% on the first $9,500 in wages. Every state has a different rate and wage base. After this initial rate expires, your rate is based on several factors, but most states rely primarily on your annual experience rating. 

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The Unemployment Tax Rate Bucket

Your ongoing tax rate will account for the money you have contributed to the system versus the charges against your account. Think of your account as a bucket filled by your unemployment tax payments and drained by your unemployment claims. As the bucket fills, your rates decrease, but as it drains, your rate increases. The goal is to keep the bucket mostly full, and the more full it gets, the lower your rates go.

This is obviously an over-simplification, and other factors that impact your rate may include your average chargeable payroll, your payment history, and the overall level of the state unemployment insurance fund, but the biggest factor us your experience rating and the level of your UI “bucket.”

Another big one is the state’s reserve fund level. If your state had to borrow money from the federal government, your rate might be a little bit higher. And there are some other factors. Sometimes they look at your industry by looking at your SIC code because sometimes certain industries are prone to higher unemployment periods in that type of thing. But really, these are the main factors that your state is going to use to set your SUI rates.

When Are Claims Charged to my SUI Account?

Different states have different unemployment claim eligibility requirements, but remember that you don’t pay SUI claims directly. Claims are paid right out of the state fund.

To be eligible to receive the benefit, the claimant must meet the following criteria.

  • They have earned enough wages in the base period to establish the claim. The definition of “enough” varies by state.
  • The claimant is unemployed through no fault of their own, more on this later.
  • They must be ready, willing, and able to work. They can’t be disabled or too sick or injured to work.
  • The claimant must be actively seeking work.

These are the general factors that apply to all states. Some states have other eligibility requirements.

What Does “No Fault of Their Own” Really Mean?

To be eligible for unemployment insurance, the claimant must be terminated or resigned due to no fault of their own. This does not necessarily mean that if someone is terminated for poor performance, they’re ineligible for unemployment benefits.

The employer must be able to demonstrate some misconduct to disqualify a claimant for unemployment insurance. It can’t just be poor performance. It has to rise to a level of misconduct absolutely.

Intentional policy violations typically do rise to a level of misconduct. Still, the employer has to show the claimant knew or should’ve known that termination could result from violating that policy.

Remember, a state worker makes this determination, and each one has a different definition of misconduct. It is tough in some states to keep someone from receiving unemployment without extensive documentation of misconduct.

Dismissal or failed job

Best Practices to Keep Your State Unemployment Tax Rate Low

Here are some best practices to keep your unemployment tax rate as low as possible.

  • Always provide an employee with a written warning regarding their misconduct before terminating them. This is essential to have any hope of the state denying their claim.
  • Distribute your employee handbook and obtain signed acknowledgment forms. You’re going to have a much better chance of successfully defending an unemployment claim if you can fight specific employee policies that are violated.
  • Investigate all harassment, discrimination, wage and hour, and other serious workplace complaints. In most cases, if an employee resigns with a good cause, they’ll be eligible for unemployment benefits, and all these things could be considered a good cause. 
  • Obtain and file written resignation letters that include the reason for resignation
  • Treat employees fairly and consistently concerning termination decisions. Remember, the state personnel that will be processing unemployment claims are themselves employees, not employers.
  • Submit all unemployment-related paperwork on time. If you don’t, you may lose your right to appeal the decision.
  • When you submit information about the separation reason, make sure you include attachments. It might be the handbook policy or written warning, the employee handbook acknowledgment form, etc.
  • Appeal the decision if you disagree with the outcome. Remember, you always have the right to appeal.
  • Prepare carefully for the appeal hearing and show up!

Get Help If You Need It

Keeping your unemployment tax rates low, especially in today’s economic environment, is not easy. It requires a Human Resources infrastructure, well-thought-out and documented policies, an employee improvement and discipline process, and a thorough understanding of your state’s system.

But despite the effort involved, keeping your rates low can save you thousands of dollars a year. Fortunately, you don’t have to navigate this system alone. If you need help developing your HR infrastructure or navigating the unemployment system, we have top-rated HR professionals who are ready to help. In some cases, they may even be able to lower your rates significantly and immediately. You can contact them by clicking the “Find HR Help Near Me” button at the top of the page.

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