If you work at a job for a certain period of time, you may be entitled to unemployment benefits if the job ends through no fault of your own. The Federal Unemployment Tax Act ensures that all employees are covered by unemployment insurance so that employees who are involuntarily terminated without cause will have a source of income while they search for a new job.

Payroll Taxes

The federal and state government take payroll taxes to fund unemployment insurance for workers. However, these payroll taxes are not taken out of the employee's paycheck. The employer funds unemployment insurance out of his share of the payroll taxes; employees' paychecks are not affected by the need to pay for unemployment.

Benefit Amounts

Employee benefit amounts depend upon how long the employee has worked prior to becoming unemployed. The formula for calculating benefit amounts varies from state to state. However, most states base benefit amounts on how many of the last four or five quarters the employee worked for and how much money he made during those quarters. Employees who worked for a longer period of time or made more money are eligible for greater benefit amounts.

Taxation of Benefits

Unemployment benefits are taxable income at the federal level as well as in most states. Taxation of these benefits may not be equal to the taxes employers pay to cover unemployment insurance costs; however, the employee who takes advantage of unemployment benefits helps pay for them by paying taxes on the benefits she receives throughout the year.

Purpose of Unemployment Insurance

Unemployment insurance programs are intended to ensure that employees have some income coming in while they search for a new job if they lose a job through no fault of their own. Thus, the employer pays for the insurance rather than the employee. Having the employer pay for unemployment insurance also discourages employers from terminating employees without good cause.