Home Tax A Full Guide to Unemployment Tax

A Full Guide to Unemployment Tax


As much as employment is necessary, so is unemployment. This is because it creates opportunities for individuals to move on to bigger and better things. However, unemployment still remains a challenge to individuals and society as a whole, due to financial constraints and other challenges that come with it. There is also the issue of unemployment taxes that is often not talked about. This guide is meant to provide insights on what unemployment tax is, how it works, and the implications that employers and employees need to be aware of.

What is Unemployment Tax?

Unemployment tax is a local and a state level tax levied on employers, which provides financial assistance to workers who suddenly lose their jobs. Each state sets its own guidelines for unemployment tax rates, reporting, and payments, and typically, the amount of tax that employers must pay depends on the size of their payroll, their history of employee layoffs, and the state in which they operate.

How Does Unemployment Tax Work?

Unemployment tax varies by state, but it usually works similarly in most states. Every employer is required to register with their state’s unemployment agency in order to receive a state unemployment tax account number. This number is used for all interactions with the state unemployment agency. Employers are then required to pay a portion of the taxable wages of their workers to the unemployment insurance trust fund, which is managed by the state.

Unemployment tax payments are made by employers on a quarterly basis. The amount of unemployment tax varies depending on the state and the experience of the employer. Some states may have a fixed rate for all employers, while others have tax rates that are adjusted based on the number of benefits their employees have received. The states use this tax to fund unemployment insurance programs which cover eligible workers who lose their jobs through no fault of their own.

Who Pays Unemployment Tax?

Employers are responsible for paying unemployment tax, not employees. If an employee is laid off due to no fault of their own, they may be eligible to receive unemployment benefits. These benefits are paid by the state unemployment agency from the unemployment insurance trust fund. While the workers don’t pay anything into the fund directly, they do contribute indirectly, as the fund is funded by taxes paid by their employers.

It is important to note that not all employers are required to pay state unemployment taxes. For instance, some non-profit organizations may be exempted from paying unemployment taxes. More information on who is required to pay unemployment taxes can be obtained from the state’s unemployment agency.

Implications of Unemployment Tax for Employers

Employers are required to comply with the state and federal regulations related to unemployment tax, or they may face penalties, interest, and legal action. Below are some of the implications of unemployment tax that employers need to consider:

1. High Unemployment Tax Rates: Employers that have a high number of former employees collecting unemployment benefits may pay higher unemployment tax rates. This is because states utilize an experience rating system to determine the competitive tax rate that will apply to employers.

2. Reporting Requirements: Employers are obligated to pay unemployment taxes and report state and federal unemployment taxes on a quarterly basis. This may be a tedious and time-consuming process, which can lead to additional costs for the employer.

3. Claims Management: Employers need to manage unemployment claims and respond timely to avoid any charges to their unemployment tax account. If an employer does not protest a claim that is ineligible or respond timely, the claim can be paid from the unemployment insurance trust fund, increasing the rate at which unemployment taxes are paid.

4. Eligibility requirements for Unemployment Benefits: Unemployment insurance programs require employees to have earned a sufficient amount of wages before they can apply for the benefits. Therefore, employers who reduce an employee’s pay or work hours may unintentionally affect their eligibility for unemployment benefits.

Implications of Unemployment Tax for Employees

While employees do not pay unemployment tax directly, it indirectly affects them, as it is factored into the cost of doing business by employers. Eligibility for unemployment benefits is determined by the state and is subject to several requirements.

Below are some of the implications of unemployment tax for employees:

1. Eligibility Criteria: Employees must meet specific criteria to qualify for unemployment benefits, including being laid off due to no fault of their own, lost their job because the employer closed their business, and meeting a minimum level of required wages.

2. Benefit Amounts: The amount of benefits an employee can receive is subject to a maximum amount set by law. The exact amount and the period of time in which payments may be made varies from state to state.

3. Duration of Benefits: The duration of benefit payments also varies by state and is based upon the employee’s employment history and the state maximums.

4. Impact on Future Employment: Employers often review an employee’s employment history before hiring them. An extended unemployment period may affect an employee’s future employability.


In summary, the unemployment tax system is designed to provide financial assistance to employees who suddenly lose their jobs. Employers are required to pay unemployment taxes, which are used to fund the unemployment insurance trust fund. By understanding how unemployment tax works, employers can stay compliant, avoid penalties and interest, and minimize their required tax payments. Eligibility for unemployment benefits is determined by the state, and employees can indirectly be affected by unemployment tax, which may affect their future work prospects.

The unemployment tax in the United States was enacted with the Federal Unemployment Tax Act. The jobless tax helps to fund workforce agencies which can assist the jobless in finding suitable work. The employer may be required to file the unemployment tax quarterly, depending on the type of business.

The Unemployment tax is used to fund unemployment programs which can assist those that are jobless in finding suitable work or in determining which type of work they would like to do.

The fund is also used to pay one half of extended unemployment benefits, with the other half being the responsibility of the state where the unemployed individual resides. States may also borrow money from this fund if they should have a number of individuals claiming unemployment benefits.

There are some types of wages that are exempt form the Federal unemployment tax. In general, there is a tax of around six percent of an individual’s salary, but only to a threshold of around seven thousand dollars. Once the worker reaches that salary, the employer no longer has to pay the federal unemployment tax.

Wages that are exempt from the federal unemployment tax include those which are paid for work performed in another country. Wages paid to family members, including children to parents or parents to children, are also exempt form the tax.

Wages paid to an employee, directly from the government, are also exempt from the tax. There are in fact a variety of wages which are exempt from the tax. Yet, in some cases those individuals may be unable to collect unemployment benefits, such as independent contractors.