Unemployment Insurance Taxes: How They Work

Unemployment is something that a number of Americans will experience at some point in their lives. What they might not know is that a large percentage of the funds for unemployment come from businesses.

We’ve broken down the basics around federal and state unemployment insurance taxes to get you up to speed.

State Unemployment Insurance or SUI

State Unemployment Insurance (SUI) is a tax-funded program required by both state and federal law (though some states require employees to contribute as well). SUI pays eligible unemployed workers benefits while they’re looking for work.

States where you have employees generally will require you to establish a SUI account to remit SUI taxes.

Federal Unemployment Tax

At the federal level, employers also must pay an unemployment tax, called the Federal Unemployment Tax Act (FUTA). Employers report their FUTA tax by filing an annual Form 940 with the Internal Revenue Service. This form helps structure the calculation of how much should be reported, given the various figures employers must consider:

• There is a FUTA-imposed tax of 6.0% on the first $7,000 of gross earnings of each employee per year. This amount may end up being closer to 0.6% due to credits received for paying SUI, but this is not guaranteed.

• Once the employee’s earnings surpass $7,000 in a given year, the employer is no longer responsible for any further FUTA tax for that year.

It’s important to research and confirm any credits your business qualifies for (in terms of state unemployment taxes paid) that may reduce your FUTA-imposed tax rate.

Related article: What is the FUTA Tax?

State Unemployment Costs

At the state level, there are two factors in calculating SUI tax: wage base and SUI tax rate.

The first factor, wage base, is the maximum amount of earnings that can be taxed in a given calendar year. This is established on a per-state basis and may change from year to year.

The second factor, SUI tax rate, is determined based on how many of former employees have filed an unemployment claim in the past. Newer companies are taxed at a “new employer” rate, which is then updated annually by the state based on unemployment claim activity. New employer rates generally range from 2-4%.

Making Sure Your Bases Are Covered

At the end of the day, you don’t have to be an insurance expert. You just need to keep these high-level requirements in mind:

• States where you have employees generally will require you to establish a SUI account to remit SUI taxes quarterly.

• You must report your FUTA tax by filing an annual Form 940 with the Internal Revenue Service.

Justworks calculates and deducts the amount of SUI your company owes. Justworks pays any outstanding FUTA taxes and files Form 940 on behalf of our customers. It’s just one more thing we’ll take off your plate so you can continue running your business and caring for your team.

For more information around how to run your business and care for your team in the current environment, check out our COVID-19 guide. Rely on trusted resources like the CDC, WHO, and DOL for more general updates and information related to the ongoing coronavirus pandemic.