Understanding Employer Responsibility For Unemployment Benefits
Its a fact of business life: Paying federal and state unemployment taxes is not optional. Small businesses, especially, might not be aware of their responsibilities when it comes to filing or responding to claims but not following the rules could result in hefty penalties.
The August jobs report showed unemployment falling to 8.4%, a notable improvement but still dramatically higher than the figure of 3.5% experienced at the turn of the year. Its never been more important for employers to understand their responsibilitiesif youre forced to furlough or lay off employees, youll want to let them know the benefits they can seek.
Here, well first cover the basics of employer responsibility for unemployment benefits and then dive into what you need to know about Pandemic Unemployment Assistance.
How Has The Generosity Of Ui Affected Employment
According to researchers at the University of Chicagos Becker Friedman Institute, about two-thirds of workers were making more from UI during the pandemic-linked expansions than when they were working. One out of five eligible unemployed workers received benefits at least twice as large as their lost earnings.
Some argue that tight labor markets reflect, at least in part, the generous unemployment insurance benefits that allowed people to stay out of the labor market. But the evidence suggests that this effect has been small. Peter Ganong from the University of Chicago and coauthors estimate that the $600 supplement reduced employment by less than 0.8% and the $300 supplement reduced employment by less than 0.5%.
Research by Kyle Coombs of Columbia University, Arindrajit Dube of the University of Massachusetts, Amherst, and co-authors found that in June 2021, 22 states ended benefits entirely for 2 million workers and reduced benefits by $300 a week for more than 1 million workers. Comparing labor markets in those states to states that retained the federal benefits, they found that earnings from work rose by only $14 a week on average, offsetting just a fraction of the $278 lost in UI benefits. Because of lower total incomes, UI recipients spent $145 less weekly. In the 19 states analyzed, that translates to a $2 billion drop in spending and a $270 million increase in earnings from June through early August.
Who Pays Suta Tax
Typically, only employers pay SUTA tax.
However, employees in three states are subject to state unemployment tax withholding. If you have employees in any of these three states, you will withhold the tax from their wages and remit the tax to the state. Employees will not handle this tax themselves.
States might exempt businesses from paying SUTA tax. For example, a state might exempt nonprofit organizations and businesses with few employees. The exemptions vary by state, so make sure you check your state laws.
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Can A Fired Employee Collect Unemployment
If youve ever wondered whether you should expect unemployment claims from fired employeesthe answer is, it depends. Unemployment insurance is generally only available for workers who have been laid off through no fault of their own, such as due to lack of work or a facility closing.
If an employee was fired for misconduct or a company policy violation, they are most likely ineligible to collect benefits. Examples of causes for termination that would exclude an employee from collecting unemployment insurance include:
How Much Are Unemployment Taxes
Both federal and state unemployment taxes are based on employee wages.
The FUTA tax rate is 6% . Most employers qualify for a tax credit of 5.4% . This lowers the FUTA tax rate to 0.6% .
Some employers might not receive the full FUTA tax credit. This will happen if a state borrows money from the federal government to cover unemployment benefits, but cannot pay the loan back within two years. The state becomes a . When this happens, your FUTA tax credit is reduced, meaning your total FUTA tax liability increases.
You only owe FUTA tax on the first $7,000 per year that you pay each employee. Wages you pay an employee beyond $7,000 per year are not taxed by FUTA.
If you receive the full FUTA tax credit, your maximum FUTA tax liability is $42 per employee for the year .
SUTA taxes do not have a standard rate. Each state sets its own rates.
When you become an employer, you must register for an account with the state unemployment agency. There is often a rate for new employers. The state will send you an updated rate every year. The state will typically base your rate on your industry, experience, and number of unemployment claims made by former employees.
Every state also sets its own wage base. This is the maximum amount of wages per employee per year that you owe SUTA tax on.
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How To Protect Your Claim
The more documentation you can provide to support your claim for unemployment benefits, the more likely you will be to prove your eligibility successfully. You should assemble any doctors notes, emails, HR files, letters from supervisors and colleagues, and any other supporting evidence of the legitimacy of your claim.
Your employer will be required to do the same, and the appeals board will make a determination of whose claim will prevail.
Be sure to file your appeal before the deadline, and continue to file for benefits while the appeals process plays out, or you will not receive benefits during that time.
Both parties are allowed to appeal the decision, and the appeals board will determine the outcome during a hearing. You will need to attend every meeting, or have a written legitimate excuse, or you risk losing your case.
Whats Happens When An Employee Files An Unemployment Claim
Its bound to happen sooner or later: An employee leaves the company, and a few weeks later you receive a notice from the state saying the employee has filed an unemployment claim. Now what?
First things first: Determine if the former employees claim is valid. If you fired them for cause or they voluntarily left the company, you can contest the claim. If they were terminated because of a situation out of their control, such as a layoff, you can accept the claim. If you accept the claim, you can either indicate that or simply do nothing and the claim will be considered accepted.
If you contest the claim, however, youve got a bit of time and effort ahead of you. Youll have to respond to the state unemployment department before the deadline on the claim . If you dont respond by the deadline, you could get hit with a higher tax rate and penalties. Include details such as the employees compensation, occupation, and employment dates, in addition to detailing exactly why the employee was terminated. Having comprehensive records in their employment file is critical to successfully winning a claim.
But the work may not be over yet. If you contest the claim and the state determines that you are in the right, the former employee can still appeal the decision. In this case, the state unemployment office will conduct a telephone hearing between your company and the terminated employee .
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Do Employees Pay Into Unemployment Insurance
Most employees do not pay unemployment taxes. Do not withhold employee wages to put toward unemployment insurance.
However, employees in Alaska, New Jersey, and Pennsylvania are subject to state unemployment taxes. In these states, you will withhold the unemployment taxes and pay them to the state on behalf of your employees.
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How Unemployment Payments Work
Your employer pays a quarterly unemployment tax to your state unemployment agency. These tax payments become part of the state’s general unemployment tax fund. If you are laid off and file for unemployment benefits, the state writes you checks using the money in this fund.
In this sense your employer does pay for your unemployment benefits, because the money comes out of a fund that is made up in part of his unemployment tax payments. However, he does not directly write your unemployment check, and there is no a direct relationship between the funds in your particular claim and the tax payments he has made.
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How Much Is A Claim Going To Cost Employers
Most employers are legally responsible to pay premiums into the trust fund on the first $7000 paid to each employee in the calendar year. Premium rates for new non-governmental employers are based on the experience of their industry grouping, if the industry grouping has an extremely high benefit payout. All other new employers are allotted a 2.7% new employer premium rate. In the past, mining and construction are the only industries with new employer rates higher than 2.7%.
Employers responsible for premiums for three consecutive calendar years as of December 31 have rates based on their skill. Premium rates vary from 0.0% to 10% for non-governmental employers and from 0.3% to 3% for governmental employers. Local and state governments and certain nonprofit employers have the choice of paying premiums or repaying the trust fund for their share of benefits paid to the former employees.
What Is An Unemployment Claim
When an employee has been let go or furloughed, they may file an unemployment claim with the state they live in. This claim is basically a notification to the state, the federal government and the previous employer that they are requesting cash benefits after being laid off. If approved, states distribute benefits using the aforementioned unemployment insurance taxes collected from employers.
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Excluded Services And Wages
Common exclusions when counting employees and determining if the wages are reportable include:
- individual owner of a business
- partners of a partnership
- limited liability members are excluded if paid in proportion to ownership interest
- family employment
- father or mother working for a son or daughter
- husband or wife working for his or her spouse
- children under 18 years of age employed by a father or mother
- the exclusions can apply to a partnership if an exempt family relationship exists between the employee and each of the partners
Note: Family employment exclusions apply to an individually owned business and not to a corporation or a limited liability company.
Check The New Unemployment Eligibility Rules
The CARES Act included $1 billion for states to expand their unemployment benefits coverage through Dec. 31, 2020. Theres also a provision that pads weekly payouts with supplemental cash through July 31, 2020. Note that these enhancements are on top of the standard unemployment benefits offered in your state.
Heads up, self-employed workers, contractors, part-timers, and anyone who was disqualified under previous assistance rules: You are now eligible to receive unemployment coverage! So is anyone who can no longer work because they had to quit their job because of the coronavirus . Here are other key changes:
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Applying The Rate Table To The Rankings
- your Notice of Tax Rate is sent in November of each year for the following tax year
- employers whose benefit ratios place them in Rank 1 are assigned the corresponding Rank 1 rate from the rate table
- likewise, employers in Rank 2 are assigned the corresponding Rank 2 rate, etc. until all employers have been assigned rates
- refer to your Notice of Tax Rate for a breakdown of your quarterly taxable wages and benefit charges
- for Federal 940 Certification purposes, the State Experience Rate indicated on the Notice of UI Tax Rate is the State Experience Rate as defined on the federal form 940
Do Business Owners Need To Pay Unemployment Insurance
Lets start with some background on unemployment insurance in Wisconsin. This article focuses on unemployment insurance from an employers perspective and specifically under Wisconsin state law. As such, we are not discussing the expanded unemployment provisions in the CARES Act, which primarily impact separated employees applying for unemployment benefits under more broad eligibility criteria. As the CARES Act provisions are federally funded, they have minimal impact on employers. In our experience, employers are not even notified as a party when a separated employee applies for benefits under the CARES Act provisions. Anyone curious about the CARES Acts specifics is invited to read our analysis here, here, and here.
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Statement Of Amount Due
If your account carries an outstanding balance, you will receive a monthly Statement of Amount Due. Interest will continue to accrue daily on contributions due until the amount is paid in full. Failure to pay may result in further collection action such as: Jeopardy Assessments, Liens, Distress Warrants, Garnishments, Injunctions and/or taking an offset from payment due to you from the State of Iowa or the Internal Revenue Service. If you are unable to make payment in full, contact UI Tax Collections to see if you qualify for a payment plan.
What Happens If An Employer Contests An Unemployment Claim
You have some work to do if a former employee submits an inaccurate claim and you want to contest it. Namely, you will need to submit documentation to show why the claim is not accurate. In some cases, you may also need to attend a hearing where you are interviewed about the facts of the claim.
In most states, a business must contest an unemployment claim within ten days of receiving the notice, or face potential penalties or tax increases. Once the claim has been contested, the company and the former employee will each receive a Notice of Determination stating whether the claim has been accepted by the state. Even if the former employees claim is denied, they may be able to appeal the decision.
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Federal Unemployment Tax Act
This is an employer-only tax that is 6% on the first $7,000 each employee earns per calendar year, which means the maximum amount youll have to pay per employee is $420 per year. Typically, youll receive a up to a 5.4% credit for paying state unemployment taxes. If your company qualifies for the maximum credit, your FUTA tax rate would be decreased to 0.6% reducing your total FUTA liability to $42 per employee per.
How Do I Get Started Paying And Reporting Unemployment Taxes
When you start a new business, you must designate an expected number of employees on your employer ID application. This provides information to the IRS and your state that you have an obligation to pay and report unemployment taxes, and they will probably contact you.
If you are not contacted, or if you decide at some later point to hire your first employee, you can get the process started by yourself. Register with your state and contact the IRS to start paying unemployment insurance.
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How To Calculate Futa
Only the first $7,000 of payments to any employee in a calendar year is subject to FUTA tax (after deducting To calculate your FUTA tax liability for each payroll, follow this process:
Begin with the FUTA taxable wages for a pay period , plus:
- Most fringe benefits, including wages and salaries, commissions, fees, bonuses, vacation allowances, sick pay, and the value of goods, lodging, food, and other non-cash benefits, and
- Employer contributions to employee retirement plans, and
- Other specific payments, as noted above.
From this amount, deduct:
- All payments that are exempt from FUTA tax and
- All amounts for each employee over $7,000 for the year.
You will need this total for all employees for the FUTA report on Form 940.
Then, take the total amount up to $7,000 for all employees and multiply it by 0.6% to get the amount of unemployment tax due.
Set aside this amount in a liability account .
How Long Will Increased Benefits Last
The program applies to workers newly eligible for unemployment benefits in the weeks starting January 27 through December 31, 2020. The extra $600 per week will be paid through July 31, while expanded coverage criteria extend through December 31, 2020.
States vary in how many weeks they offer unemployment benefits, but in all cases the federal government will extend this period by 13 weeks.
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Are Some Payments Exempt From Futa Tax
The IRS says you may exclude certain payments to employees from your calculations for employment taxes. These include:
- Fringe benefits such as the value of some meals and lodging, contributions to accident or health plans, and payments for cafeteria plans
- Group term life insurance
- Employer contributions to retirement and pension plans, like 401 plans
- Payments for dependent care
Build An Emergency Fund
An emergency fund is a smart way to reduce your reliance on unemployment benefits. If you’ve built the recommended savings to cover three to six months of living expenses, the unemployment benefits won’t matter nearly as much.
Start tucking 10% to 20% of your income or as much as you can afford into your emergency fund now to ensure these funds are in place when you need them.
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Unemployment Insurance As Economic Stimulus
Unemployment benefits are designed first to relieve distress for jobless workers and their families. In recessions and the early stages of recoveries, however, they provide an additional benefit: stimulating economic activity and job creation. In fact, a major reason Congress created the basic UI program during the Great Depression was to help boost the economy and jobs.
The problem for most businesses in an economic slump is not lack of capacity to meet existing demand but lack of demand to fully utilize their existing capacity. To stop the destruction of jobs and begin to put people back to work, it is critical to stimulate demand. One of the best ways to do this is to target financial relief toward unemployed workers who need a replacement for lost income. People whose income is disrupted in a recession and who lack the savings to tide them over are the ones most likely to spend quickly any added income they receive. Thus, policies that put customers in stores with money to spend will likely do more to close the output gap and create jobs than, for example, business tax breaks.
A Labor Department report commissioned during the George W. Bush Administration and released in 2010 reinforced CBOs conclusion. It found that in the depths of the Great Recession, federal emergency UI benefits boosted employment by about 750,000 jobs.