What Does an Employer Pay for Unemployment?

by Devra Gartenstein; Updated September 26, 2017
If you keep your workers on your payroll, your unemployment tax rate will decrease.

The amount that an employer pays for unemployment depends on the amount of the company's payroll, its track record for retaining employees and the rates that are particular to the location where the company employs workers. 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 six percent of applicable wages as of 2013. Unlike state unemployment tax rates, your federal unemployment tax rate does not decrease if you do not lay off workers. But you'll save money on federal unemployment tax if you have fewer employees with higher earnings rather than a greater number of employees who earn lower wages.

State Tax Rate

Your state unemployment tax rate depends on your company's history. Like car insurance, your company pays rates depending on the likelihood of facing a claim against your account. When an employee terminates, she may file a claim for unemployment benefits and the more claims filed against your company, the higher your rate can climb. 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 with few claims for unemployment benefits, the tax rate will go down; if the number of laid-off or terminated employees rises, so will your tax rate.

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Payroll Amount

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, the maximum amount of wages subject to federal unemployment taxes is $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 may eligible for state unemployment benefits. You could be eligible to collect unemployment if your employer lays you off due to lack of work, but you may be 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. The company pays a higher unemployment tax rate based on claims against the employer's account.

About the Author

Devra Gartenstein is an omnivore who has published several vegan cookbooks. She has owned and run small food businesses for 30 years.

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