Paul Sanchez
Unemployment insurance is a federal-state program financed through federal and state employer payroll taxes. Employers are responsible for paying state unemployment taxes, and some states require employees to contribute as well. Unemployment insurance benefits are calculated based on an individual's average weekly wage, up to a maximum set by law. The number of weeks an individual is eligible to receive benefits is called the duration of benefits and is calculated by dividing the maximum benefit credit by the weekly benefit amount. The calculation of unemployment insurance rates varies depending on the state, industry, and other factors.
| Characteristics | Values |
|---|---|
| Federal Unemployment Insurance Tax Act (FUTA) | 6.0% x employer's taxable wages |
| FUTA tax rate for employers in states not subject to a FUTA credit reduction | 0.6% |
| Maximum FUTA tax per employee per year | $42 |
| State unemployment insurance tax rates | Determined by state law |
| State unemployment tax | Paid to state workforce agencies |
| Employers must pay Federal unemployment taxes if | 1. They pay wages to employees of $20,000 or more in any calendar quarter or 2. In each of 20 different calendar weeks in the current or preceding calendar year, there was at least 1 day in which they had 10 or more employees performing service in agricultural labor |
| Employers must pay state and Federal unemployment taxes if | 1. They pay wages to employees totaling $1,500 or more in any quarter of a calendar year or 2. They had at least one employee during any day of a week during 20 weeks in a calendar year |
| Employers of domestic employees must pay state and Federal unemployment taxes if | They pay cash wages to household workers totaling $1,000 or more in any calendar quarter of the current or preceding year |
| Standard new employer SUTA tax rate | Varies by state, e.g. 1.25% in Nebraska for non-construction industries |
| Maximum weekly benefit amount | $1,051 per week (as of October 1, 2024) |
| Weekly benefit amount | Approximately 50% of the average weekly wage |
| Number of weeks of full unemployment benefits | 30 weeks (capped at 26 weeks during periods of extended benefits and low unemployment) |
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What You'll Learn
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act (FUTA) authorises the Internal Revenue Service (IRS) to collect a federal employer tax used to fund state workforce agencies. Employers pay this tax annually by filing IRS Form 940. FUTA covers the costs of administering the UI and Job Service programs in all states. It also pays for half of the cost of extended unemployment benefits during periods of high unemployment. Additionally, FUTA provides a fund for states to borrow from if needed to pay benefits.
FUTA taxes are calculated by multiplying 6.0% by the employer's taxable wages. The taxable wage base is the first $7,000 paid in wages to each employee during a calendar year. Employers who pay their state unemployment taxes on time receive an offset credit of up to 5.4%, regardless of the rate of tax paid to the state. The FUTA tax rate for employers in states not subject to a FUTA credit reduction is generally 0.6% (6.0% - 5.4%), for a maximum FUTA tax of $42 per employee per year.
There are three tests to determine whether an employer must pay FUTA tax: a general test, a household employees test, and an agricultural employees (farmworkers) test. Under the general test, an employer is subject to FUTA tax on the wages paid to employees who aren't household or agricultural employees. The employer must file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return if they paid wages of $1,500 or more to employees in any calendar quarter or had one or more employees for at least some part of a day in any 20 or more different weeks in a year. The 20 weeks do not have to be consecutive, and all full-time, part-time, and temporary employees are counted.
For the household employees test and the agricultural employees test, refer to Section 14, Federal Unemployment (FUTA) Tax in Publication 15 (Circular E), Employers Tax Guide. Additional information for household employers is available in Publication 926, Household Employer's Tax Guide. FUTA tax applies to the first $7,000 paid to each employee as wages during the year. This amount is often referred to as the federal or FUTA wage base. An employer's state wage base may differ based on the applicable state rules.
Once an employer's FUTA tax liability for a quarter (including any FUTA tax carried forward from an earlier quarter) exceeds $500, they must deposit the tax by electronic funds transfer. In years with credit reduction states, liabilities owed for credit reduction must be included with the fourth-quarter deposit. Employers must use electronic funds transfer (EFT) for all federal tax deposits.
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![The effect of state laws and economic factors on exhaustion rates for regular UI benefits : a statistical model Walter Nicholson and Walter Corson. 1978 [Leather Bound]](https://m.media-amazon.com/images/I/61IX47b4r9L._AC_UY218_.jpg)
State Unemployment Tax Act (SUTA)
The State Unemployment Tax Act (SUTA) is a state-level payroll tax that employers must pay to fund unemployment benefits for workers who lose their jobs. SUTA funds state unemployment insurance programs, which provide temporary financial assistance to former employees who have lost their jobs due to layoffs or other reasons beyond their control. SUTA taxes are paid to state workforce agencies and are used solely for the payment of benefits to eligible unemployed workers.
SUTA is an employer tax, meaning it is typically paid by employers rather than employees. However, there are a few exceptions: Alaska, New Jersey, and Pennsylvania require both employers and employees to pay SUTA taxes. In addition, some states require employees to contribute to state unemployment tax. Generally, employers are responsible for paying state unemployment taxes when running payroll, and these taxes are a percentage of employee wages.
The SUTA tax rate varies from state to state and is based on how many unemployment claims have been made in the past. Each state sets its own range of tax rates, and these rates may be based on factors such as industry and the size of the employer. States also set wage bases for unemployment tax, meaning that employers only contribute to unemployment tax until the employee earns above a certain amount. The taxable base per employee is, on average, around $10,000, much less than the average yearly earnings of a worker. This results in firms paying a fixed "lump sum" tax per worker they employ.
SUTA payments are typically due quarterly, with deadlines set by each state. Employers must calculate their tax payments based on their assigned SUTA rate and the wages paid to employees within the calendar year. States typically assign a unique SUI tax rate to each business, and new employers can generally expect a standard new employer SUTA tax rate. However, some states do not use a standard new employer rate, in which case new employers must wait for the state to assign them a starting rate.
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Weekly benefit amount
The weekly benefit amount is the amount of money that an unemployed person can expect to receive each week from their state's unemployment insurance program. This benefit is typically calculated as a percentage of the individual's previous average weekly wage, subject to a maximum amount set by law. For example, in Massachusetts, eligible individuals will receive a weekly benefit amount of approximately 50% of their average weekly wage, up to a maximum of $1,051 per week as of October 1, 2024.
To calculate the average weekly wage, the total wages earned during the base period are divided by the number of weeks in that period. The base period is typically defined as the last four completed calendar quarters prior to the effective date of the claim, which is usually the Sunday of the week that the claim is filed. For example, if an individual earned $14,482 during their base period, their average weekly wage would be $724.61 ($14,482 divided by 20 weeks).
The weekly benefit amount is then calculated by multiplying the average weekly wage by the applicable percentage. In the example above, 50% of $724.61 is $362, which would be the individual's weekly benefit amount.
It's important to note that the number of weeks an individual is eligible to receive benefits is also considered. This duration is calculated by dividing the maximum benefit credit by the weekly benefit amount. For instance, if an individual has a maximum benefit credit of $10,860, they would be eligible to receive $362 per week for 30 weeks ($10,860 divided by $362).
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Duration of benefits
The duration of unemployment insurance benefits is determined by state law. In most states, unemployment benefits typically last for 26 weeks. However, each state dictates the length of unemployment benefits, and this can vary from 12 to 28 weeks. For example, Florida and North Carolina each offer 12 weeks, while Missouri provides 13 weeks of unemployment benefits.
During periods of high unemployment, additional weeks of benefits may be available. For instance, under the CARES Act, which responded to the COVID-19 pandemic, all states received access to federal funding to provide additional weeks of Pandemic Emergency Unemployment Compensation (PEUC) benefits to people who had exhausted their regular state benefits.
The number of weeks of unemployment benefits an individual is eligible to receive is called their "duration of benefits" or "maximum benefit credit". This is calculated by dividing their maximum benefit credit by their weekly benefit amount. For example, if an individual has a maximum benefit credit of $10,860 and a weekly benefit amount of $362, they would be eligible to receive $362 for 30 weeks.
In Massachusetts, the duration of benefits is calculated based on the percentage of lost hours worked. Under the WorkShare program, an individual's weekly benefit rate is equal to a percentage of their regular UI benefit rate. For example, if an individual lost 20% of their weekly hours, their WorkShare benefit would be 20% of their unemployment insurance benefit rate. They can collect this reduced benefit for up to 52 weeks.
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Employer's taxable wages
Employers' unemployment insurance taxes are calculated based on their taxable wages, which are the total wages paid to employees during a given period. Each state has its own method for calculating these taxes, and employers must adhere to the rules and regulations of the state(s) in which they operate.
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Frequently asked questions
FUTA authorises the IRS to collect federal employer taxes to fund state workforce agencies. FUTA taxes are calculated by multiplying 6% by the employer's taxable wages (the first $7,000 paid to each employee annually).
Employers must pay federal unemployment taxes if they pay wages to employees of $20,000 or more in any calendar quarter. They must also pay these taxes if, for any day in 20 different calendar weeks in the current or preceding year, they had 10 or more employees performing agricultural labour.
The weekly benefit rate is calculated as approximately 50% of your average weekly wage, up to a maximum set by law. For example, in New Jersey, the maximum weekly benefit rate for 2024 is $854, which is calculated as 60% of the average weekly wage.
Working part-time or receiving a pension may reduce your weekly benefit rate. To be eligible for partial benefits, you cannot work more than 80% of the hours normally worked in the job.
