What is unemployment insurance?
Unemployment insurance is a support precaution designed to help people who lose their jobs through no fault of their own. Unemployment insurance allows eligible applicants to receive a portion of their former wages for a set period of time or until they secure employment again.
To qualify for unemployment benefits, an employee cannot have been fired for poor performance or have quit voluntarily, and when they are drawing unemployment insurance, they cannot refuse to look for work.
Related: What Does Terminated Mean?
How does unemployment insurance work?
When a worker is terminated through no fault of their own, they have the right to file a claim with their state’s unemployment office. Once a claim is filed, there’s a review by the state unemployment office, which involves verifying the claim with the worker’s now-former employer.
If the claim is approved, the worker receives a portion of their previous salary. The benefit expires after a set period of time or when the worker finds a new job (whichever comes first).
In most states, unemployment insurance pays between 30% to 50% of a worker’s former salary (but with a maximum cap). Most states require employees to have worked at a job for a minimum amount of time to be eligible to claim the benefit.
Who pays for unemployment benefits?
Unemployment insurance is funded by employer payroll taxes at both the state and federal level. The collected funds go into an insurance pool from which unemployed people draw. Each individual state has its own unemployment office that manages applications and payments, with the requirements to qualify for benefits varying from state to state.
There are two sections of a company’s payroll tax that go towards unemployment insurance: a portion for the Federal Unemployment Tax Act (FUTA) and another for the State Unemployment Tax Act (SUTA).
FUTA tax for unemployment
The FUTA tax is 6% on $7,000 of each employee’s annual wages, or a maximum of $420 per employee per year. Employers are required to pay the FUTA tax and in exchange are eligible for a maximum 5.4% tax credit. Companies that qualify for the maximum tax credit end up paying 0.6% of the $7,000 wage liability, making the per-employee cost of unemployment insurance for FUTA a maximum of $42 per employee per year.
SUTA tax for unemployment
Each state determines its own rates for SUTA tax, so it’s important to research the requirements where your company is based. Companies that operate in multiple states or have employees working remotely in different states may be subject to additional unemployment tax. While the federal taxable income limit for unemployment insurance is $7,000, states can set their own wage base for SUTA taxes.
SUTA tax rates can be impacted by the number of unemployment claims made against your company. Employers who lay off a large number of employees may be subject to a higher SUTA rate than those that have not been liable for any unemployment claims.
What responsibilities do employers have when managing unemployment?
Your company has several responsibilities when it comes to setting up employment benefits, paying appropriate taxes and responding to claims:
Setting up payroll
When processing payroll, make sure you have a system set up to pay the appropriate amount of FUTA and SUTA tax for each employee. If you outsource your company’s payroll to a payroll processing company, they should have automatic features that set aside unemployment tax payments alongside your company’s social security and Medicare contributions.
Ensure that you are paying for unemployment tax yourself rather than deducting it from employee pay. It is your responsibility to calculate your unemployment tax credit eligibility and estimate the total cost of unemployment to your business.
Filing form 940
When you file taxes, form 940 summarizes what you have paid in federal unemployment tax and what you owe. You are responsible for filling out form 940 for every year that you employ people at your company. States may have additional tax forms that you have to fill out when filing company taxes.
Contesting claims
When a former employee files for unemployment insurance, the state unemployment office where the employee is filing will contact you to ask about the circumstances surrounding the employee’s leaving. If you believe that the former employee doesn’t have grounds for the claim, you are responsible for contesting it and providing proof that the employee was fired with cause, quit their job or otherwise violated their right to unemployment benefits.
If you do not contest a claim, it will automatically be considered valid and could impact your future SUTA rates.
Related: Typical Severance Packages: What Employers Should Know
What happens after an employee files an unemployment claim?
When a former employee files for unemployment, you will receive a notice explaining their claim and giving you a deadline to contest it. Due to the need for out-of-work people to get insurance funds quickly, there’s usually a very tight timeline for responding.
If you had a valid reason for firing an employee or they voluntarily quit their job, you have grounds to contest their claim. If they were laid off, they are fully within their rights to claim unemployment and you cannot contest their claim.
FAQs about unemployment insurance
Can an employer deny an unemployment claim?
Employers can disagree with an unemployment claim and submit evidence that it is not a valid claim, but they themselves do not have the authority to deny an unemployment claim. They have to fill out the proper paperwork and then it is up to the state unemployment office to deny or approve the former worker’s claim.
Valid reasons for an employer to contest a worker’s claim are if the worker quit or was fired for cause. A company can also contest the claim if the worker was hired as a temporary employee through a staffing agency, or if the worker was an independent contractor. In those cases, a worker is not within their rights to file an unemployment claim and should not be doing so.
What happens if I contest an unemployment claim?
If you contest an unemployment claim, the state’s unemployment department will respond with a ruling. That may be the end of the matter, or the employee can appeal the ruling. Depending on the state, the process may then escalate into a formal hearing involving legal counsel.
In which state do remote employees file for unemployment insurance?
Remote employees file for unemployment insurance based on where they live and work. Their claim is not tied to where your company is based (unless that happens to be the same state where the worker lives). For example, if you are based in New York and you lay off an employee who lives in Montana, then Montana’s unemployment office will be the one contacting you about the employee’s claim.
Does it cost an employer if an employee collects unemployment?
Employers do not have to pay an additional cost if a former employee starts collecting unemployment because they have already paid their FUTA and SUTA tax contributions. A large number of former employees collecting unemployment can, however, have an impact on future unemployment tax rates for your company.
