If you’re like most businesses, you’re paying into the unemployment insurance program. While the unemployment rate is lower now than it was during COVID-19, the unemployment insurance cost for your business can still be significant. Are you clear on what you owe for unemployment insurance so you can best budget amid rising inflation and operating expenses? Let’s find out.
In this article, we’ll help you understand your financial obligations when it comes to unemployment insurance. After reading this, you’ll understand your costs and what factors can impact your rates so you can take steps to reduce your financial burden.
Unemployment insurance is a combined federal and state program that provides cash benefits to eligible workers that are unemployed through no fault of their own. That means those who quit a job voluntarily or are fired for cause are typically ineligible.
The program temporarily replaces a portion of lost wages for workers who have been laid off, are available to work, and are looking for work. Generally speaking, unemployment insurance provides up to 26 weeks of benefits and, on average, replaces about half of a worker’s previous wages. However, this varies by state. For example, in Massachusetts, regular unemployment benefits can last up to 30 weeks.
When issued, federal law extensions can affect the length of time employees can collect, such as during the pandemic.
Each state will also have a maximum amount that an individual can collect. In Mississippi, the state with the lowest amount, the weekly limit is $235; conversely, in Washington, it’s $929.
The unemployment insurance program is almost always funded by employer contributions through the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). These are payroll taxes that are based on a percentage of employees’ earnings. Most businesses, other than those exempted like nonprofits and religious organizations, must pay these taxes, which drive their unemployment insurance cost.
While in most states, only the employer pays unemployment taxes, three states also require employee contributions to unemployment insurance: Alaska, New Jersey, and Pennsylvania. In these states, you would withhold and pay the SUTA tax to the state on your workers’ behalf:
To understand how your payroll taxes are calculated, it’s important to know how the FUTA and SUTA rates are set.
The standard FUTA tax rate is 6% on the first $7,000 of employee wages (a max of $420 per year per employee). However, companies can qualify for a tax credit of up to 5.4% based on their timely payment of state unemployment taxes on Form 940. So for these businesses, the rate would be as low as 0.6%.
Just be aware that employers in a credit reduction state can’t claim the full credit. A credit reduction state has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable timeframe. Employers paying wages subject to unemployment insurance (UI) tax in those states will owe a greater amount of tax, driving a higher unemployment insurance cost for their business.
State unemployment tax is calculated on a percentage (called experience rating, which we’ll discuss below) of each worker’s earnings up to a wage limit that varies by state. For example, the wage base limit for Massachusetts is currently $15,000, which means you’ll only pay the tax on the first $15,000 of an employee’s wages.
The current wage limits for each state for 2023 are as follows, although some are expected to increase in the New Year:
| Alabama | $8,000 |
| Alaska | $45,200 |
| Arizona | $8,000 |
| Arkansas | $10,000 |
| California | $7,000 |
| Colorado | $20,400 |
| Connecticut | $15,000 |
| Delaware | $14,500 |
| District of Columbia | $9,000 |
| Florida | $7,000 |
| Georgia | $9,500 |
| Hawaii | $51,600 |
| Idaho | $46,500 |
| Illinois | $12,960 |
| Indiana | $9,500 |
| Iowa | $36,100 |
| Kansas | $14,000 |
| Kentucky | $10,800 |
| Louisiana | $7,700 |
| Maine | $12,000 |
| Maryland | $8,500 |
| Massachusetts | $15,000 |
| Michigan | $9,500 |
| Minnesota | $38,000 |
| Mississippi | $14,000 |
| Missouri | $10,500 |
| Montana | $40,500 |
| Nebraska | $9,000 ($24,000 for employers in the highest UI tax rate group) |
| Nevada | $40,100 |
| New Hampshire | $14,000 |
| New Jersey | $41,100 |
| New Mexico | $30,100 |
| New York | $12,300 |
| North Carolina | $28,000 |
| North Dakota | $38,400 |
| Ohio | $9,000 |
| Oklahoma | $25,700 |
| Oregon | $47,700 |
| Pennsylvania | $10,000 |
| Rhode Island | $24,600 ($26,100 for employers in the highest UI tax rate group) |
| South Carolina | $14,000 |
| South Dakota | $15,000 |
| Tennessee | $7,000 |
| Texas | $9,000 |
| Utah | $41,600 |
| Vermont | $13,500 |
| Virginia | $8,000 |
| Washington | $67,600 |
| West Virginia | $9,000 |
| Wisconsin | $14,000 |
| Wyoming | $29,100 |
While the FUTA rate is fixed, your SUTA tax rate is variable and set by the state. To determine this rate, the state considers:
When you first start your business, your state’s unemployment tax agency will initially assign you a standard new employer rate. After a specified period of time, for example, three years in Massachusetts, the state will assign you a rate based on the two factors we just discussed. The SUTA rate may change every year or even as soon as quarterly in some states like New Hampshire.
To calculate your unemployment tax, you would multiply your SUTA rate by each employee’s earnings up to the wage limit for your state.
For example, let’s say you have an accounting business with 10 employees in New Hampshire, where the taxable wage limit is $14,000 and your tax rate is 5%. In that case, you’d multiply $14,000 by 5% then multiply that figure by 10 employees for a total of $7,000 in SUTA taxes.
Since the number of workers who collect unemployment during the lookback period is the primary factor behind your SUTA tax rate, the fewer workers who collect, the lower your cost of unemployment insurance will be.
As a result, one way to keep your SUTA tax rate lower is to reduce employee turnover. There are several steps you can take to help retain your workers:
Another way to potentially lower your SUTA tax rate is how you handle layoffs. For example, if you opt to pay severance for departing employees for a certain period of time, that could eliminate or reduce the amount of time they’ll collect unemployment benefits and, therefore improve your experience during the lookback period.
You’ll also want to keep good documentation when terminating employees for cause, since these workers are typically not eligible to collect unemployment. With a proper paper trail that demonstrates their misconduct, such as violating a company policy, you will increase the likelihood that their claim for unemployment benefits gets denied. It’s a good idea to have an employee handbook that explains all of your policies so expectations are clear.
While unemployment taxes can be costly and may be challenging for your business to pay, you’ll want to make sure you make accurate and timely payments on both a federal and state level to avoid further financial consequences to your company. For example, if you’re a Massachusetts employer, interest will accrue on unpaid principal at a rate of 12% per year from the quarter due date until fully paid.
Since the cost of unemployment insurance is such an important part of your payroll, it’s essential that you get your calculations, deductions, and deadlines right. To help you understand how to maintain your compliance with your unemployment insurance program responsibilities, read our 2023 guide for employers.