The Federal Unemployment Tax Act authorizes the Internal Revenue Service to collect unemployment tax or insurance. The State Unemployment Tax Act mandates the respective state agency to collect state unemployment insurance. In most cases, an employer is not supposed to withhold unemployment insurance from employee paychecks.
The federal and state unemployment programs work jointly to provide unemployment benefits to eligible employees who have lost their jobs. Such benefits are provided through the unemployment taxes most employers, and a few employees, are required to pay. Only three states require employees to pay unemployment insurance. In all other states, only the employer pays state unemployment tax. The federal government does not require employees to pay federal unemployment tax, only the employer.
Alaska, New Jersey and Pennsylvania are the only states that require employees to pay state unemployment insurance. Annual wage bases and tax rates vary by state. For example, as of 2011, Alaska’s withholding rate is 0.58 percent of the first $34,600 paid to the employee, New Jersey’s withholding rate is 0.985 percent of the first $29,600 paid to the employee, and Pennsylvania’s withholding rate is 0.8 percent of all wages paid to each employee. To arrive at an employee’s unemployment withholding for the year, the employer multiplies the tax rate by the annual wage base, if applicable.
An employer pays federal unemployment tax at the rate shown in IRS Circular E for the respective tax year. As of 2011 and before July 1, an employer pays FUTA tax at 6.2 percent of the first $7,000 paid to each worker; after June 30, it pays 6 percent. The rate is reduced to 0.8 percent and 0.6 percent, respectively, if the employer paid its state unemployment tax appropriately.
The respective state agency sends the employer its state unemployment tax rate for the next year before the end of the prior year. Tax rates vary by state and generally depend on the amount of former employees who draw benefits on the employer’s account, the longevity of the business and sometimes the size of the state’s trust fund.
The state requires an employer to perform wage reporting to show its -- and if applicable, the employee’s -- unemployment tax liabilities. Many states require quarterly reporting. The IRS requires an employer to perform annual reporting via Form 940 to report its federal unemployment tax liabilities.
- Workforce Security: State Unemployment Insurance Benefits
- IRS: Circular E
- Thomas and Thorngren: An Early Look at UI Tax Rates for 2011
- Georgia Department of Labor: File Tax and Wage Reports
- Arkansas Department of Labor: Employment Security Tax
- 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.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.