It’s a fact of business life: Paying federal and state unemployment taxes is not optional. Small businesses, especially, might not be aware of their responsibilities when it comes to filing or responding to claims. It’s important to know all of the rules because not paying them or paying them incorrectly could result in hefty penalties.
What is Unemployment Insurance?
When an employee is let go due to a situation beyond their control – for example, a worker who was laid off – they can apply to receive a percentage of the wages they would have earned if they were still employed to tide them over until they can find another job. Some unemployed workers don’t qualify for unemployment benefits, such as:
- Workers who are fired
- Workers who leave voluntarily
- Independent contractors
- People who simple elect not to work
The money an unemployed person gets comes from unemployment insurance, which is funded by those payroll taxes your company pays to the government. Unemployment insurance is managed by both federal and state governments. Each state has its own unemployment insurance program, which the federal government oversees. As each state has its own rules for administering unemployment benefits, it’s important to know what they are if your company has locations in multiple states.
Unemployment taxes are made up of the Federal Unemployment Tax Act (FUTA) tax and states use a State Unemployment Tax Act (SUTA) tax, a predominantly employer paid tax (some states require employees to pay a portion).
Federal Unemployment Tax Act (FUTA)
This is an employer-only tax that is 6% on the first $7,000 each employee earns per calendar year, which means the maximum amount you’ll have to pay per employee is $420 per year. Typically, you’ll receive a up to a 5.4% credit for paying state unemployment taxes. If your company qualifies for the maximum credit, your FUTA tax rate would be decreased to 0.6% reducing your total FUTA liability to $42 per employee per.
By January 31 each year, you’ll file Form 940, which shows how much FUTA tax you’ve paid for the year.
State Unemployment Tax Act (SUTA)
Different states use various terms when referring to SUTA, including reemployment tax and state unemployment insurance (SUI). Each state determines its own wage base, which is the highest amount of wages per employee that SUTA applies to. As an example, if a state’s wage base is $12,000, you can only withhold SUTA from the first $12,000 you pay your employees.
Each state is also responsible for determining its own SUTA tax rates, which vary for each employer. Just like when your car insurance goes up if you’ve had a few fender benders, SUTA tax rates are determined by how many unemployment claims you’ve been hit with in the past.
Who gets the money if employees work in multiple states?
All states use the following four factors to determine which state should receive their unemployment tax dollars if an employee works in more than one state:
- Where the employee’s work is localized – If the employee mainly works in one state and only occasionally works in another state, taxes are paid to the main state.
- Where the base of operations is – This is where the employee reports to work or where they have their main office.
- Where the place of direction or control is – This is the employer’s main location.
- Where the employee lives
What’s happens when an employee files an unemployment claim?
It’s bound to happen sooner or later: An employee leaves the company, and a few weeks later you receive a notice from the state saying the employee has filed an unemployment claim. Now what?
First things first: Determine if the former employee’s claim is valid. If you fired them for cause or they voluntarily left the company, you can contest the claim. If they were terminated because of a situation out of their control, such as a layoff, you can accept the claim. If you accept the claim, you can either indicate that or simply do nothing and the claim will be considered accepted.
If you contest the claim, however, you’ve got a bit of time and effort ahead of you. You’ll have to respond to the state unemployment department before the deadline on the claim (usually 10 days). If you don’t respond by the deadline, you could get hit with a higher tax rate and penalties. Include details such as the employee’s compensation, occupation, and employment dates, in addition to detailing exactly why the employee was terminated. Having comprehensive records in their employment file is critical to successfully winning a claim.
But the work may not be over yet. If you contest the claim and the state determines that you are in the right, the former employee can still appeal the decision. In this case, the state unemployment office will conduct a telephone hearing between your company and the terminated employee (and their legal counsel).
Your attorney or legal team should represent you on the call, so it’s important to discuss the hearing prior to it. Just like a legal hearing, you’re permitted to have witnesses and evidence on the call, so be sure to get all people and documentation lined up beforehand. The burden of proof to convince the state that the former employee was terminated for cause is on your shoulders, so make sure you’ve got everything you need.
If all of this sounds overwhelming, it’s time to hand over the payroll reins to a partner with years of experience helping 30,000 companies just like yours. Paycor’s HR and benefits management software can help you maintain compliance with responsibilities surrounding unemployment benefits. Give us a call and we’ll tell you how we can assist.
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