A Review of Unemployment Insurance Taxes

A Review of Unemployment Insurance Taxes

When you have employees, you must pay federal and state unemployment taxes. These taxes fund unemployment programs and pay out benefits to employees who lose their jobs through no fault of their own. Generally, unemployment taxes are employer-only taxes, meaning you do not withhold the tax from employee wages. (However, some states require that you withhold additional money from employee wages for state unemployment taxes.)

At the federal level, employers must pay an unemployment tax, called the Federal Unemployment Tax Act (“FUTA”). There is a FUTA-imposed tax of 0.6% on the first $7,000 of gross earnings of each employee per year. (This rate is originally 6.0% but is generally reduced by a credit for paying state unemployment taxes in full on time, as long as the state isn't determined to be a credit reduction state.) Once the employee’s earnings surpass $7,000 in a given year, the employer is no longer responsible for any further FUTA tax for that year.

At the state level, there are two factors in calculating State Unemployment Insurance (“SUI” or “SUTA”) tax: wage base and SUI tax rate.
The first factor, wage base, is the maximum amount of earnings that can be taxed in a given calendar year. This is established on a per-state basis and may change from year to year.

The second factor, SUI tax rate, is determined based on how many former employees have filed an unemployment claim in the past. Most states send employers a new SUTA tax rate each year. Newer companies are taxed at a “new employer” rate, which will eventually be changed based on unemployment activity. The amount of time for the new employer rate depends on the state (for example, Wisconsin assigns the new employer rate for three years).

You can generally reduce your state unemployment tax by lowering your rate of employee turnover, and by minimizing the number of former employees who file for unemployment benefit payments during the calendar year. Wisconsin also has the option of voluntary SUI payments which may lower an employer’s tax rate for the next year.

COVID-19 and SUI

Across the country over the past couple of months, unemployment insurance claims have risen due to individuals who have lost work due to the COVID-19 pandemic. Some or all of your employees have filed for unemployment insurance benefits.

As was discussed, SUI rates are determined and updated annually based on unemployment activity for that business. If you had employees file for unemployment due to COVID-19, you may be worried that your SUI rate will sky-rocket in 2021.

This has certainly been a consideration for each state. As of mid-May, 26 states and the District of Columbia have declared — mostly through executive order or labor department guidance — that COVID-19-related layoffs will not be charged against employers for purposes of calculating the experience ratings that determine their UI tax rates.

At the time of publishing this newsletter, Wisconsin, Minnesota, and Michigan declared that they would not charge employers for COVID-19-related claims. Illinois was still undetermined.

Keep in mind that even if your state has decided not to charge against COVID-19-related claims, your SUI rate may still go up in 2021. You may have had or will have other unemployment insurance claims in 2020 that will affect your rate.