We’ll go over general information about unemployment taxes, what to do if your employee files for unemployment, and how the CARES Act expands unemployment benefits.
This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Acts (SUTAs) require employers to pay unemployment taxes to the federal government and their state agency. These funds provide unemployment benefits for out-of-work employees. We’ll go over general information about unemployment taxes, what to do if your employee files for unemployment, and how the CARES Act expands unemployment benefits.
What are unemployment taxes?
Unemployment taxes are one form of payroll taxes that employers are required to pay. These taxes fund unemployment benefits, which act as insurance in case workers find themselves out of work. Both Federal Unemployment Taxes (FUTA) and State Unemployment Taxes (SUTA), in most cases, are paid for by the employer, meaning this isn’t a tax that comes out of employees’ paychecks.
Federal Unemployment Tax
The FUTA tax rate is 6% of an employee’s wages on the first $7,000 of wages subject to FUTA in a calendar year. However, if you also pay SUTA on time and in full, you may receive a tax credit of up to 5.4%. This tax credit would reduce your FUTA to 0.6% of an employee’s wages on the first $7,000 of wages subject to FUTA in a calendar year. To save you time on the math, with the tax credit, FUTA would cost you $42 per employee per calendar year. You receive this credit when you file your Form 940: Employer’s Annual Federal Unemployment Tax Return.
The exception to receiving a 5.4% FUTA tax credit is if you are paying SUTA taxes in a Credit Reduction State. Visit the Department of Labor’s page on FUTA credit reductions to learn more about Credit Reduction States.
State Unemployment Tax
State Unemployment Taxes (SUTAs) are also known as State Unemployment Insurance (SUI) and reemployment tax. These funds are used by state agencies to pay for unemployment benefits for out-of-work employees. SUTAs are paid by the employer, unless you have an employee in Alaska, New Jersey, or Pennsylvania, in which case the employee would also pay SUTAs.
The tax rates for SUTAs vary from state to state and within the state itself. The amount of each employee’s wage that is taxable also varies depending on the state you’re in; however, it is consistent across all employers in the state.
Each state has a unique calculation to determine the tax rate each employer pays. For the purpose of simplicity, the calculation your state will use to determine your SUTA tax rate is based on your taxable payroll, the amount you’ve paid into unemployment, and the number of unemployment claims against your account.
Your SUTA rate can change every year, so be sure to keep up with the tax rate you should be paying. State agencies will notify you at the end of the year or during the third quarter if your SUI rate has changed. If you use Square Payroll to run your payroll, you may need to notify us of your new SUI rate if it changes.
What happens when your former employee files for unemployment?
If your employee was laid off or furloughed, they are eligible to file with the state for unemployment benefits. Once the former employee files the claim, you will receive a notice from the state that your unemployment insurance claim was filed. This notice is only sent to the unemployed worker’s most recent employer.
If you believe that the unemployment claim is valid, you can indicate that on the notice, or do nothing and the claim will be accepted. If you believe that the claim is invalid, you’ll need to contest the claim with your state unemployment office.
Some reasons why the claim may be invalid include:
- The employee was fired for misconduct
- The employee left voluntarily
- The employee is choosing not to work
- The worker was an independent contractor (however, independent contractors can collect unemployment under the CARES Act)
If the claim is accepted, the funds for the unemployment benefits are taken out of your employer tax account. This account accumulates all the unemployment funds you’ve been paying into over time. When funds have to be withdrawn from your employer tax account, your SUTA rate can be increased to offset the withdrawal. The more claims filed against your account, the more your SUTA rate will increase.
How does the CARES Act change unemployment?
The CARES Act expanded unemployment benefits to assist workers that find themselves unemployed due to COVID-19. Before we detail what the expanded unemployment benefits look like, you should know that as an employer, the unemployment landscape for most states hasn’t changed. However, you’ll want to do your due diligence and check in with the unemployment agency in your state to be sure.
Expanded unemployment due to COVID-19
The federal government is supplementing $600 per week in addition to the unemployment funds the unemployed worker would collect from the state (which come from the state unemployment agency as usual).
Unemployment benefits are also extended to the following groups in addition to furloughed and laid-off workers:
- Part-time workers
- Independent contractors, the self-employed, or gig workers
- Those that cannot work due to COVID-19 (included are those that need to take care of a sick family member, provide childcare due to daycare/school closures, or are under medically mandated quarantine)
- Small business owners
The amount of time unemployment benefits last varies by state, however, in all cases, the benefits are extended for an additional 13 weeks.
If you’d like to learn more about extended unemployment benefits during COVID-19, you can read more on the US Department of Labor’s website.
As an employer, it’s important to fulfill your obligation to pay unemployment taxes. Aside from being required by law, paying these taxes helps your employees, who will rely on these benefits while they look for work. If you pay under the table and don’t pay into unemployment taxes, your employees could find themselves without the funds they need to pay their bills.
Tax compliance can be tricky to navigate, but if you use a payroll service, like Square Payroll, we help keep your payroll above board.