Do I Have to Pay Unemployment Insurance?

by Angie Mohr; Updated September 26, 2017
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The Federal Unemployment Tax Act is a program jointly managed by federal and state tax authorities. It provides employees who are let go or laid off through no fault of their own wage replacement benefits for a set number of weeks. This allows the unemployed an extended amount of time to find a new job. The amount of benefits provided and the length of time they are issued is determined by each state.

Overview of Unemployment Insurance

The unemployment insurance program provides benefits to laid-off works for an average of 26 weeks—although the exact length of time is determined by each state administration. The program is funded completely through employer payroll taxes to federal and state tax commissions. Employees do not pay into the program. The federal portion of the unemployment insurance program pays for the administration of the program in all states, as well as one-half of the extended benefits paid out. The federal fund also loans funding to states if they have an increase in unemployment that drains the state's resources.

Employees

Employees do not pay into the unemployment insurance plan but most full time workers are eligible to receive it. To be eligible, the worker must be a permanent, full-time employee and not considered self-employed or a contractor. If the employee is fired due to incompetence or poor work performance, he is generally not eligible. Once an unemployed person determines that she is eligible for the program, she must submit an application and go through a two-week waiting period for which benefits are not paid retroactively.

Employers

When employers remit their payroll taxes to federal and state tax authorities, they calculate the required FUTA. The federal portion is 6.2 percent of the first $7,000 of an employee's gross earnings in a year. However, if the state portion is paid on time, employers can take 5.4 percent from that rate and pay only 0.8 percent. Each state's remittance requirements are different. The only other employer requirement is to verify an employee's employment history when the employee applies for benefits.

Unemployment Benefits

The benefits an unemployed worker is eligible for is determined by the state in which they reside. The amount represents a portion of their average wages. Most states offer the benefits for 26 weeks, but, at times, Congress can extend that period in times of economic crisis. This was most recently done in 2011 to alleviate the financial impact of the rising unemployment rates. Unemployment benefits end when the eligibility period runs out or when the employee starts a new job, whichever comes first.

About the Author

Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.

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