By Lee Allphin, Employer Advantage Founder and Chairman of the Board
Unbeknownst to many, it is the employer that pays for unemployment benefits through Unemployment Insurance (UI) taxes collected by the state and the federal government. This falls within the category of payroll taxes that every employer must pay for each employee.
As an employer, your responsibility for unemployment benefits begins when you hire an employee, not when you terminate employment. Managing unemployment is a complex process because of the many considerations that play into being compliant with unemployment obligations as well as the calculations necessary to determine the variable rates that will be collected from each employer.
Here’s a deeper look into Unemployment:
What is unemployment?
Sadly, “unemployment” is a word many are very familiar with at some point in their lives. Unemployment is defined as when a person doesn’t have a job, is actively searching for employment, and is available to work. In the United States, the term unemployment is often used as a measure of the health of the economy. When unemployment is voluntary, it means that a person has left his job willingly. When it is involuntary, it means that a person has been fired or laid off.
What is Unemployment Insurance (UI)?
The Unemployment Insurance (UI) program provides temporary weekly cash payments to people who are unemployed through no fault of their own. The cash payments are meant for unemployed persons to temporarily provide necessities for themselves and their families while seeking new employment. The basic idea is that the money would be immediately spent, thus providing a direct stimulus to the local economy.
What is State Unemployment Insurance (SUTA)?
Public unemployment insurance first appeared in Wisconsin in 1932 as part of an effort to provide relief to workers who were unemployed as a result of the 1929 financial collapse, called the Great Depression. Six other states followed suit before the first federal unemployment insurance program was created as part of the Social Security Act of 1935. By 1937, every state in the Union and the then-territories of Alaska and Hawaii had enacted their own insurance programs. Originally, the UI program lasted 16 weeks at the state level. Today, the UI program lasts 26 weeks in most states.
What is Federal Unemployment Insurance (FUTA) and what it’s purpose?
The Federal Unemployment Tax Act (FUTA) is the original legislation that allows the government to tax businesses with employees for the purpose of collecting revenue that is then allocated to state unemployment agencies and paid to unemployed workers who are eligible to claim unemployment insurance. The FUTA rate is 6.0% and employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. The taxable wages for each employee is the first $7000 paid per year.
How is SUTA collected and benefits paid?
Employers must establish an unemployment fund (a SUTA account) in each state they have workers. A new business will pay a certain starting rate for each state. The rate is then used along with taxable wages paid to calculate the quarterly premium. As years go by, if a business does not have many unemployment claims, the account balance increases and the annual rate decreases. If a business has high turnover and pays more claims, the SUTA rate will increase.
Employer Advantage takes pride in its track record of keeping these rates from rising. We have saved our clients thousands of SUTA dollars by documenting terminations, helping lower turnover and managing claims.
How does a business know how much is in their SUTA account and monitor the usage?
An annual report from the state is sent to the employer every year with account balances and unemployment claims paid out. It is extremely important that every employer knows who is receiving benefits from their account. A former employee who voluntarily quit or one that was terminated for misconduct or violating a company policy should not be eligible to receive unemployment wages from that employer’s account. It’s the employer’s responsibility to reply to each unemployment claim filed. This can be time-consuming if you have high turnover, or expensive if the claims are ignored.
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