Who pays for unemployment? What employers need to know

Published

Dec 18, 2024

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State and federal payroll taxes provide temporary wage replacements to employees who lose their jobs through no fault of their own. But how does unemployment insurance work for employers? Learn more about the employer responsibility for unemployment benefits in the guide below.

What is unemployment insurance?

Unemployment insurance is temporary pay that people out of work receive in case they were laid off due to reasons beyond their control, through no fault of their own—like business closures or layoffs, for example.

The purpose of unemployment insurance benefits is to provide former employees with some financial security while they’re in between jobs. Unemployed people can collect unemployment insurance and benefits for a maximum of 26 weeks in most states, or until they get hired again.

Unemployment insurance (UI) is different from workers’ compensation insurance, which provides payments to employees who get hurt on the job. Workers’ comp can cover the medical bills and wages lost during recovery.

Who is eligible for unemployment insurance?

According to the US Department of Labor, employees qualify for unemployment if:

They are unemployed “through no fault of their own.” This can mean there were layoffs, business closures, or other circumstances outside of someone’s personal control.
They meet eligibility rules. To qualify for UI benefits in most states, it is required that you worked consistently and earned wages within the last 12 to 24 months and are actively looking for a new job.

Who pays for unemployment benefits?

Unemployment benefits are funded through federal and state payroll taxes, paid by employers.

The benefits are distributed from the insurance pool that every employer needs to contribute to, through two separate payroll taxes: the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA).

Federal Unemployment Tax Act (FUTA)

FUTA is a federal tax that employers pay to help fund unemployment compensation for American workers.

The Federal Unemployment Tax Act (FUTA) unemployment tax rate is currently 6.0% for the first $7,000 employers pay to each employee as wages during the year (a maximum of $420per employee per year). The $7,000 is FUTA or federal base wage.

Employers can receive a 5.4% credit if they pay state unemployment taxes, reducing their effective FUTA rate to 0.6%.

State Unemployment Tax Act (SUTA)

SUTA is a state-level tax that employers pay to fund UI benefits for unemployed workers in their state.

The SUTA rate and wage base is different for each state, and varies depending on the employer’s claims history and other factors. For example:

In Texas, base wage is $9,000, and SUTA tax rates vary between 0.25% and 6.25%
In New York, base wage equals $12,500, and SUTA tax rates are between 2.025 % and 9.825%
In Washington, base wage is $68,500, and SUTA tax rates vary between 0.27% and 6.02%

Frequent claims will increase unemployment tax costs for employers.

Learn more about the differences between SUTA and FUTA here.

Employer responsibilities for unemployment benefits

Below are several responsibilities employers have regarding UI benefits.

Setting up payroll systems

Employers need to withhold FUTA and SUTA from employee wages, which fund unemployment insurance.

Establishing a compliant payroll system is the first step for employers in managing unemployment benefits. Employers must ensure that their payroll systems accurately track the following for tax purposes:

Employee compensation
Employee classification (full-time, independent contractor, etc) and applicable labor laws
Federal, state, and local tax withholdings
PTO accrual information

The federal government and state laws dictate how employers should maintain payroll records. Accurate payroll data ensures that both federal and state agencies have the necessary information for unemployment claims processing and benefit payments.

Submitting form 940

The IRS Form 940 (called Employer's Annual Federal Unemployment (FUTA) Tax Return) is used by employers to report the yearly federal unemployment taxes (FUTA) they owe.

If employers fail to submit this form to the IRS each year, or to pay FUTA taxes, they are susceptible to penalties and interest charges.

Responding to unemployment claims

Employers need to immediately respond to any unemployment claim filed by a former employee.

When an employee applies for unemployment benefits to their state’s unemployment office, the office will contact the employer to verify the employee's employment history and reasons for separation.

Employers need to provide accurate and timely information about employment dates, wages, and the reason for termination (voluntary resignation, layoff, or termination for cause).

If an employer fails to respond or provides false information, the unemployment office can delay the claims process or be charged with wrongful employee payments.

Contesting and appealing unemployment claims

Employers can contest or appeal an unemployment claim a former employee makes if they don’t think the former employee meets the eligibility criteria for unemployment compensation.

In this case, employers need to present the state’s unemployment agency with detailed documentation and evidence of ineligibility, which can include information about the former employee’s work track record, disciplinary actions, poor performance, unprofessional conduct, or proof that they’ve resigned voluntarily.

If the state unemployment agency rules in favor of the employee, the employer can appeal the decision and go through an administrative hearing process, where the employer needs to present new evidence and explain their disagreement with the decision.

Unemployment benefit audits

To make sure companies process unemployment claims accurately—and get correctly taxed—employers should familiarize themselves with the Benefit Accuracy Measurement (BAM) program.

According to the US Department of Labor:

“This program is designed to determine the accuracy of paid and denied claims in three major Unemployment Insurance (UI) programs. It does this by reconstructing the UI claims process for samples of weekly payments and denied claims using data verified by trained investigators.”

Regular audits are conducted to prevent fraud and ensure that both employers and workers are adhering to unemployment insurance rules. Employers should maintain accurate and detailed records to facilitate the audit process and ensure that they are compliant with all legal requirements.

How does unemployment insurance work for employees?

Unemployment insurance regulations vary by state—but as a rule, it serves as a temporary relief for unemployed people who lose their source of income through no fault of their own.

Employees need to meet several requirements to be eligible for unemployment compensation and benefits; in most states, conditions include:

Sufficient previous employment: Employees must have worked a minimum amount of time and earned a certain amount of wages during a base period.
Reason for Unemployment: If employees are terminated for cause, they typically aren’t eligible. Qualified reasons for unemployment include layoffs, workplace downsizing, or business closures.
The ability and willingness to work: Employees typically must prove they’re actively applying for jobs.

Former workers can prove their eligibility through employment history records, income, and job search efforts.

To receive unemployment compensation, employees must:

File the unemployment claims on time
File weekly or biweekly (depending on the state) claims and prove they’re jobless but looking for new job opportunities
Report any income, including unemployment insurance
Appeal in case their claim is denied, following the specific state-mandated process

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How to reduce unemployment costs

How does unemployment affect the employer?

Unemployment insurance costs are a significant expense for employers. Below are several ideas about how to lower the cost of unemployment insurance for employers.

1. Maintain accurate employee records

Accurate records of employee performance, disciplinary actions, and terminations can help protect employers when contesting an unemployment claim.

If an employee files for unemployment after being terminated, having clear documentation of the circumstances (such as performance issues or misconduct) can serve as evidence to dispute the claim if necessary. This reduces the likelihood of paying unnecessary benefits, which can lead to higher tax rates.

2. Hire strategically to improve retention

Retaining workers means fewer separations, and therefore fewer unemployment claims.

You can reduce turnover and ultimately lower unemployment costs with effective hiring practices like:

Assessing candidates for cultural fit and filling skills gaps
Implementing a thorough interview process that minimizes bias
Setting and communicating clear job expectations from the start

3. Train and retrain employees

Employees who feel valued and supported through continuous training are less likely to leave their roles voluntarily or be terminated for performance issues.

Regular retraining ensures that workers remain skilled and adaptable to changes in their roles or the business, reducing the chances of layoffs or involuntary separations. A stable workforce can contribute to a lower unemployment tax rate over time, so be sure to invest in employee training and development.

4. Conduct exit interviews to identify preventable turnover

Exit interviews provide valuable insights into why employees leave the organization. When employers understand the reasons for turnover, they can identify trends such as poor onboarding, ill-equipped management, or misaligned expectations.

5. Review your unemployment tax rate options

The majority of US states have an experience rating system to determine unemployment insurance tax rates for employers. Under this system, the tax rate an employer pays is based on their history of unemployment claims filed by former workers. With this in mind, employers should monitor unemployment claims to protect future taxes from spiking.

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With Rippling, you can automate payroll and handle both federal and state unemployment taxes worry-free. With Rippling Payroll, you get:

Multi-country payroll processing: Calculating and distributing employee salaries, wages, bonuses, and deductions.
Tax compliance: Filing and payments of payroll taxes in accordance with local laws and to the correct local entities.
Benefits administration: Managing employee benefits for your global workforce, including health insurance, retirement plans, and other perks.
Local compliance: Ensuring adherence to local labor laws and regulations in different countries.
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Unemployment benefits FAQs

Do employees pay unemployment tax?

No, employers do; by paying SUTA and FUTA taxes, they fund the unemployment benefits.

Is it possible for an employer to contest an unemployment claim?

Yes. An employer can contest an unemployment claim if they believe the employee isn’t eligible and the claim is based on incorrect information. Employers need to gather evidence (such as written warnings, emails, and performance reviews) if they intend to contest the unemployment claim, and explain their formal protest in detail.

Are terminated employees eligible for unemployment benefits?

Terminated employees are eligible for unemployment benefits if they were let go through no fault of their own—such as layoffs, workforce reductions, or other circumstances beyond their control.

In which state should remote employees file for unemployment insurance?

Remote employees should file for unemployment in the states they’re physically working from.

How much do employers pay for unemployment in Massachusetts?

In Massachusetts, new employers pay a SUTA tax rate of 2.42% for the first three years of business, applied to the first $15,000 of each employee’s wages in a calendar year.

Experienced employers pay between 0.94% to 14.37% on the first $15,000 of each employee's wages; those with a history of more claims will pay a higher rate, while those with fewer claims may pay a lower rate.

Massachusetts employers also pay a FUTA tax rate of 6.0% on the first $7,000 of wages (reduced to 0.6% with the state tax credit).

How much unemployment will I get if I make $1000 a week in Florida?

Floridians making $1,000 a week can get a maximum weekly unemployment compensation of $275, as applied by the Florida's benefit calculation formula: 1/26th of the total earnings in the highest-earning calendar quarter of the base period, up to a maximum weekly benefit amount of $275.

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