The federal government's unemployment benefit program was introduced in the Social Security Act of 1935 and was designed to assist employees who lose their jobs. Unemployment insurance provides financial assistance for a base period of up to 26 weeks or until the employee finds a new job.
The U.S. Department of Labor oversees this program, but state laws regarding tax rates can vary, and approved state agencies are responsible for distributing the funds to qualified individuals. The funding for UI benefits comes from a tax paid by employers. Business owners should use IRS Form 940 to file their federal unemployment tax return.
Who Qualifies for Unemployment Insurance?
All unemployed workers in the United States do not necessarily qualify for unemployment insurance benefits. First, eligible workers have to fit the definition of an "employee," which means independent contractors, freelancers and self-employed individuals typically do not meet the eligibility requirements for unemployment compensation. If self-employment is not something you'll be giving up soon, but you would like the opportunity to fall back on unemployment benefits, consider changing your business structure from a sole proprietorship to an S corporation. This will allow you to designate yourself as an employee and pay the applicable taxes.
Next, workers cannot collect unemployment benefit payments unless they lost their job through no fault of their own or for relatively minor reasons. For example, layoffs are a common reason unemployment insurance is distributed to affected workers. However, if you got fired for serious misconduct, don't count on being able to collect unemployment.
Finally, in order to be eligible for unemployment insurance, you have to demonstrate that you're an active job seeker within the labor market and not just taking a 26-week vacation.
Who Pays for Unemployment Insurance?
Employers fund the unemployment insurance program through unemployment tax, which is not withheld from employee wages. Employers must pay this tax if they have at least one employee on their payroll for 20 calendar weeks or if they have paid employees at least $1,500 in a calendar quarter.
The amount of unemployment tax (sometimes called the re-employment tax) an employer must pay is determined by the number of unemployment claims filed against them and by the applicable state's unemployment tax rate. State unemployment tax rates are typically a set amount for new employers, but employers are assigned a specific unemployment tax rate at a later date. Employers only need to pay unemployment tax for an employee until that employee earns a predetermined amount, called the "wage base".
For example, in North Carolina, the unemployment tax rate for new employers is just 1%, but businesses in this state can later be assigned an unemployment tax rate that is anywhere from 0.6% to 5.76%. This tax rate can be updated each year. However, due to North Carolina's wage base, employers in this state currently only need to pay their assigned unemployment tax rate on an employee's first $25,200 in earnings.
Disputing an Unemployment Claim
When a former employee files an unemployment claim against your company, your unemployment tax rate is likely to increase. Therefore, if you believe an ineligible worker is seeking unemployment assistance, you may wish to dispute the claim. For example, because employees are only eligible for unemployment benefits if they lost the job through no fault of their own, you may wish to dispute a claim made by an employee who was let go for sexual harassment.
However, disputing unemployment claims can use up company resources, so it's wise to not rush into this decision. Collecting unemployment insurance benefits is very helpful for many people while in between jobs, and it's probably not worth disputing an unemployment insurance claim for someone who was fired because he just wasn't a good fit for the job.
- Patriot Software: Do Employers Have to Pay Unemployment Taxes?
- Patriot Software: What Is My State Unemployment Tax Rate?
- Bloomberg Tax: North Carolina Unemployment Taxable Wage Base to Rise for 2020
- Paycor: SUTA Tax
- IRS: About Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
- NerdWallet: Unemployment Benefits for Self-Employed: There Is a Way
- CareerOneStop: Unemployment Benefits
- U.S. Department of Labor: Employment and Training Administration
- Nolo: Unemployment Benefits: Contesting an Employee's Claim
- World Health Organization. "Rolling updates on coronavirus disease (COVID-19)." Accessed April 7, 2020.
- Congress.gov. "H.R. 748—CARES Act." Accessed April 7, 2020.
- United States Department of Labor. "UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 15-20." Accessed July 1, 2020.
- Whitehouse. "Memorandum on Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus Disease 2019." Accessed Sep. 8, 2020.
Cathy Habas specializes in marketing, customer experiences, and behind-the-scenes management. Cathy has contributed to sites like Business and Finance, Business 2 Community, and Inside Small Business. She served as the managing editor for a small content marketing agency before continuing with her writing career.