Understanding Employer Responsibility for Unemployment Benefits
Understanding Employer Responsibility for Unemployment Benefits

Understanding Employer Responsibility for Unemployment Benefits

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).

reviewing-unemployment-reports

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:

  1. 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.
  2. Where the base of operations is – This is where the employee reports to work or where they have their main office.
  3. Where the place of direction or control is – This is the employer’s main location.
  4. Where the employee lives

terminated-employee-packing-box

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.

More to Discover

How Does The Government Shutdown Affect Tax Returns?

How Does The Government Shutdown Affect Tax Returns?

Officially now the longest government shutdown in history, hundreds of thousands of federal employees are furloughed—some are required to work, some are not— but none are receiving paychecks. For some, the timing couldn’t be worse. Tax season is upon us and many American workers are left wondering what the government shutdown means in regard to their 2018 tax returns or tax status in general. If you or your HR department find yourselves inundated with questions from curious employees, be sure to arm yourself with the most recent information. Here’s what to tell employees during the government shutdown. Do I have to pay federal income tax during the shutdown? Yes. Despite the government shutdown, employees still need to pay income tax....

How Does the 2019 Government Shutdown Affect Human Resources?

How Does the 2019 Government Shutdown Affect Human Resources?

The consequences of the government shutdown are widespread. From furloughed federal employees, delayed tax returns and long lines at TSA checkpoints, few Americans can escape its impact. Unfortunately, as an HR leader, you won’t get by unscathed. It’s not just “business as usual” for most organizations because the shutdown affects the work done on a day-to-day basis. Let’s review some of the biggest ways the government shutdown is affecting HR departments. E-Verify is Down The system used to confirm an employee’s eligibility status to work in the U.S. is inaccessible. Overseen by the Department of Homeland Security, E-Verify takes the information found on an employee’s I-9 form and electronically compares it to records from the Social...

How to Staff for Payroll Administration: Roles and Responsibilities

How to Staff for Payroll Administration: Roles and Responsibilities

Payroll administration is an essential function for every business. From issuing/distributing paychecks and maintaining tax compliance to calculating payroll deductions and garnishments, administrators wear several hats. If you own a business and are looking to staff your payroll department, here’s what you need to know. What Do Payroll Administrators Do? Depending on the size of a business, the payroll department may have one employee or a dedicated team, all with varying levels of experience and responsibilities. Payroll Practitioner l (entry-level) This entry level position is the grease that keeps the wheels of the payroll department rolling. They perform essential, yet routine duties. Their responsibilities include: Maintaining...

PTO Payout Laws By State

PTO Payout Laws By State

Most companies have formal paid time off policies. Regardless of whether you call it vacation time, sick time, furlough, PTO, PDO or some combination of the above, you should pay attention to states’ laws. Surrendering your terminated employees’ accrued and unused vacation time isn’t subject to federal law, but it’s important to pay attention to states’ laws since regulation is under their purview. If your company has locations in multiple states, it’s important to review all statutes regarding separation pay. This handy table should provide the basic information you need to know but be sure to check state departments of labor for specific guidelines. State Statutory Requirements Addressing Vacation Pay Use-It-or-Lose-It Policy Payment...