Letting employees go is never easy. But if you’re dealing with staggering profits, unproductive workers, or the effects of COVID-19, you might not have a choice. When your employees become unemployed, they may be eligible for unemployment benefits. But, how does unemployment work for employers? What are your responsibilities?
How do unemployment benefits work?
If an employee loses their job through no fault of their own (e.g., downsizing), they may be eligible for unemployment benefits. Employees may also apply for partial unemployment benefits if their employer reduces their work hours. Unemployment is a portion of the former employee’s compensation they receive while they look for new work.
Unemployed individuals can apply to receive unemployment insurance benefits through their state unemployment office. If approved, states distribute benefits.
In most cases, unemployed individuals must meet a few state-specific requirements before receiving their benefits, such as:
Actively looking for work Going through a waiting period
However, a number of states have made temporary changes to how unemployment benefits work due to the coronavirus pandemic. Examples include extended benefits to self-employed individuals and waived waiting period and active work search requirements.
So, if unemployed individuals are the ones applying for benefits and states are the distributors, where do employers come into play?
Employer responsibility for unemployment benefits: Taxes
As an employer, how does unemployment work? Your responsibility for unemployment benefits begins when you hire an employee, not when you terminate employment.
When you hire new employees, report them to your state. You must pay federal and state unemployment taxes for each employee you have. These taxes fund your state’s unemployment insurance program.
Federal Unemployment Tax Act (FUTA) tax is an employer-only tax. It is 6% on the first $7,000 each employee earns in a year, meaning you will pay a maximum of $420 per employee per year. Most employers receive a tax credit of up to 5.4%, meaning your FUTA tax rate would be 0.6%. With the maximum tax credit, your FUTA tax liability would be $42 per employee per year.
State Unemployment Tax Act (SUTA) tax is generally an employer-only tax, but some states require employee contributions, too. Tax rates vary by state, and each state also sets its own wage base. If you have employees working out of a different state, follow the unemployment tax rules for multi-state employees. Generally, the state determines your SUTA tax rate based on factors like your experience, industry, and how many former employees claimed unemployment benefits.
Independent contractors are not eligible to receive unemployment benefits because you do not pay unemployment taxes on their pay. Only employees whom you’ve paid FUTA and SUTA taxes for are eligible to receive these benefits.
How does unemployment work for employers?
Now that you know your employer responsibility for unemployment benefits, you might wonder what happens when someone files a claim. How does unemployment affect the employer?
When a former employee files a claim for unemployment benefits, you receive a notice. The state sends this “Notice of Unemployment Insurance Claim Filed” to the employee’s most recent employer.
Now, onto the part you really want to know. Who pays for unemployment—do employers pay unemployment? Yes … and no.
Again, you are responsible for paying FUTA and SUTA tax for your employees. And when former employees file for unemployment benefits, youContinue reading