As an employer, you know you have to pay certain taxes, like unemployment taxes. But you may be wondering, Do employees pay into unemployment insurance? Get the scoop on whether or not your employees need to pay into unemployment.
Overview of unemployment
What is unemployment insurance? When an employee becomes unemployed through no fault of their own, they can receive unemployment insurance benefits. These benefits are funded by payroll taxes.
Unemployment insurance is jointly run by federal and state governments. Each state has its own unemployment insurance program, and the federal government oversees each state’s program.
To receive unemployment insurance benefits, a worker must be eligible. An employee cannot receive unemployment if they:
Opt not to work Quit their job voluntarily Are fired due to performance issues
Workers who are eligible for unemployment receive a percentage of the wages they would have earned if they were still employed.
Types of unemployment taxes
There are two types of unemployment taxes that you have to pay into as an employer:
FUTA tax SUTA tax
Learn more about the two types of unemployment taxes below.
The Federal Unemployment Tax Act (FUTA) is a federal law that imposes an unemployment tax on employers. FUTA tax is an employer-only tax. Employees do not have to pay into federal unemployment.
Most employers have to pay FUTA tax. However, some employers are not required to. You must pay FUTA tax if you have:
At least one employee for at least part of a day in any 20 or more different weeks out of the year OR Paid $1,500 or more in wages to employees during any calendar quarter
The FUTA tax rate is 6%. Federal unemployment tax only applies to the first $7,000 you pay to each employee in a calendar year. Once an employee $7,000 or more during the year, stop paying FUTA tax on that employee’s wages. The most you can pay for FUTA tax per employee, per year is $420 ($7,000 X 6%). However…
…You may be able to take advantage of the FUTA tax credit. Most employers are eligible for a federal unemployment tax credit that reduces their FUTA tax rate. The largest credit you can receive is 5.4%. Employers with the maximum credit only have a rate of 0.6% (6% – 5.4%) on the first $7,000 of each employee’s wages. The maximum amount you would pay under the FUTA tax credit, per employee, per year, is $42.
Keep in mind that not all employers qualify for the FUTA tax credit.
SUTA tax works similarly to FUTA tax, but it’s for state unemployment. The State Unemployment Tax Act (SUTA) tax is a type of payroll tax that states require.
There are a few names that SUTA tax goes by, depending on the state. SUTA tax may also be called:
State unemployment insurance SUI tax Reemployment tax
Some states may exempt certain businesses from paying state unemployment tax. For example, in some states, nonprofit organizations and businesses with few employees are not required to pay SUTA tax.
Each state also has its own SUTA tax rate. When you register as an employer, your state typically tells you what your rate is. As you gain experience, your SUTA tax rate can change. The rate can vary depending on:
The state IfContinue reading