The amount that an employer pays for unemployment will depend on the amount of his or her payroll, his track record in keeping employees and the rates that are particular to his state. In addition, all employers must pay a federal unemployment tax that the IRS funnels back to the states to help pay administrative costs for unemployment programs.
Federal Unemployment Tax
Employers must pay federal unemployment tax on the first $7,000 in wages paid to each employee in a year. If you also pay unemployment insurance tax to your state, your federal unemployment tax rate is .8 percent of applicable payroll as of 2011. Unlike state unemployment tax rates, your federal unemployment tax rate does not decrease if you do not lay off workers. However you will save money on federal unemployment tax if you have fewer employees with higher earnings rather than a greater number of employees each earning less money.
State Tax Rate
Your state unemployment tax rate is based on your history as an employer. Like car insurance, your rates are based on the insurer's assessment of the likelihood of facing a claim against your account. When you first open your unemployment insurance account, your tax rate will be relatively high because you have no track record. If you operate your business for several years without laying off an employee, your tax rate will go down; if you repeatedly lay off employees, your tax rate will increase.
For example, the unemployment insurance rate for new employers in California is is 3.4%.
The amount that you pay in unemployment tax also depends on the total amount of your payroll. Both federal and state unemployment taxes are calculated as percentages, so higher gross payroll will translate to a higher unemployment premium even if your tax rate is low.
However, wages subject to federal unemployment taxes are capped at $7,000 per employee, so federal unemployment tax depends less on your gross payroll amount than on the wages paid to each employee. For example, if you have two employees who each earn $15,000 per year, you will owe federal unemployment tax on $14,000 worth of wages, or $7,000 per employee. If you have six employees who each earn $5,000 per year, you will owe federal unemployment tax on the entire $30,000 payroll.
How It Works
If you are unemployed due to circumstances that are not your own fault, you are eligible for state unemployment benefits. You are eligible to collect unemployment if your employer lays you off due to lack of work, but you are ineligible if you simply do not feel like getting up and going to work unless you have a medical condition that makes it difficult to do so.
Your employer does not directly pay the unemployment benefits that you receive, but he will pay a higher unemployment tax rate because you have made a claim against his account.
- Florida Department of Revenue: Employer Information
- U.S. Bureau of Labor Statistics. “How the Government Measures Unemployment.” Accessed Aug. 17, 2020.
- U.S. Bureau of Labor Statistics. “Schedule of Releases for the Employment Situation.” Accessed Aug. 17, 2020.
- U.S. Department of the Treasury. “The Financial Crisis Response in Charts,” Page 2. Accessed Aug. 17, 2020.
- U.S. Bureau of Labor Statistics. “Labor Force Statistics From the Current Population Survey, (Seas) Unemployment Rate.” Accessed Aug. 17, 2020.
- U.S. Bureau of Labor Statistics. ”Labor Force Statistics From the Current Population Survey, (Unadj) Unemployment Rate.” Accessed Aug. 17, 2020.
- Board of Governors of the Federal Reserve System. “The Goals of Monetary Policy and How We Pursue Them.” Accessed Aug. 17, 2020.
- The White House, President Barack Obama. “The Economic Benefits of Extending Unemployment Insurance.” Accessed Aug. 17, 2020.
- Oklahoma State University Institute of Technology. "Skills Gap Misery Index: Background Information." Accessed Aug. 17, 2020.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.