Unemployment Taxes: What They Are and How They Apply to Business Owners

January 3, 2023
minute read

There are many challenges business owners are forced to navigate and overcome throughout their careers.  

Managing unemployment taxes is a subject that’s not only prevalent but often difficult for employers to understand, especially if they’re in the beginning stages of running a business.  

For many new business owners, unemployment taxes are unfamiliar territory with foreign terminology and guidelines.  

Unemployment Insurance

When individuals are out of work for reasons beyond their control, unemployment insurance supplies them with regular payments until they’re able to find another position.  

Unemployment compensation helps individuals in the workforce remain financially stable between jobs.

Understanding the Basics of Unemployment Taxes

As a business owner, you’re interested in reducing your rates as much as possible. With that said, unemployment taxes involve a few basics that will improve your understanding of its constituents.  

There are two types of unemployment taxes considered primary – federal and state.  

Federal Unemployment Taxes

Administered by the Department of Labor, the Federal Unemployment Tax Act (FUTA) declares that all businesses must pay FUTA taxes.  

If they’re an educational or governmental organization, they’re either exempt from this obligation or qualified as a charitable or religious organization. All FUTA taxes are paid to the federal government.

State Unemployment Taxes

Every state in the country has a State Unemployment Tax Act (SUTA). Any organization that’s exempt from having to pay FUTA taxes are also exempt from paying SUTA taxes.  

Each state possesses its own set of individual guidelines for unemployment taxes, all of which are directly paid to the state by the company’s employer.  

Who is Responsible for Paying Unemployment Taxes?

Employers are the ones solely responsible for unemployment taxes and employees cannot contribute to these payments.  

Companies make payments for FUTA through their federal payroll tax contributions. As for SUTA, they pay through state payroll tax contributions.  

Unemployment Tax Rates and How They’re Determined  

As of now, the FUTA rate is 0.6% of the first $7,000 of wages, also referred to as the “taxable wage base”.  

With this in mind, any wages surpassing $7,000 annually are exempt from federal unemployment tax. Regarding SUTAs, tax rates vary in each state, ranging from 1% to 3.4%.  

Employers are responsible for paying federal and state unemployment taxes. They have the option to do so quarterly or at the time of their payroll contributions. Business owners should speak with their local Department of Labor to verify when their payments need to be made.

Unemployment tax rates are determined by the rate of unemployment. State unemployment tax rates are considered variable, as opposed to federal tax rates. The rates primarily depend on the industry, state, and the employer.  

States will often assign a starting tax rate for new businesses and in some cases, this depends on the company’s industry. However, rates have the ability to change over the course of a business’ lifetime.

Companies with more unemployment claims may witness an increase in their unemployment tax rate. On the other hand, companies with fewer claims are likely to experience reduced rates, which are also referred to as “experience ratings”.  

What is an Experience Rating?

When an insured party is subject to heaps of loss compared to the amount of loss experienced by similar insured parties, this is known as an “experience rating”.  

Employee’s compensation premiums are determined using an experience rating, which is based on the industry classification and the employer’s claim history.


Is it Possible to Lower Your Company’s Unemployment Tax Rates?

It is possible. In fact, there are many ways to do so. Employers who diligently pay their federal state taxes are eligible to receive discounts. In accordance with federal guidelines, employers that contribute to their state SUTA in a timely manner can lower the amount of FUTA taxes.  

Companies that regularly make its state unemployment contributions and lack any late payments, they’re granted a 5.4% credit reduction against required FUTA payments by the federal government.  

Naturally, this can decrease a company’s FUTA costs by a whopping 90%.


When is an Employee Eligible to Collect Benefits?

This varies by state. Also known as the “base period”, employees can collect unemployment compensation when they’ve been on the job for a certain amount of time. The base period is 365 days in many states; however, it can vary in others.  

With this in mind, carefully assess new employees during their trial periods to reduce your claims experience.  

Keeping your experience levels down is another way to decrease costs for state unemployment insurance. Remember, employees who’ve lost their job for reasons outside of their control are automatically eligible for benefits.  

These benefits do not apply to workers who were either terminated with cause or decided to leave their job.  

Stick to the Basics  

While unemployment taxes can pose as a challenge for some business owners, there’s a way to simplify the otherwise complicated process.  

Unemployment taxes requires an understanding of its core fundamentals, including completing payments on time and maintaining the right documentation. Performing these consistently will result in an easier process overall that could save you money.  

In short, follow the basics.  

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