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A Brief Guide to State Unemployment Taxes

Sifting through unemployment tax law is a difficult and time-consuming task. The heart of this problem is that each state has its own set of unemployment tax rules and regulations and is also subject to federal laws, which are standard across all 50 states. 

Interpreting unemployment tax law is a complex undertaking as it is; the COVID-19 pandemic has added multiple layers of complexity to the process. Now, with additional legislation like the CARES act and FFCRA, it can be challenging to know where to turn when you have questions about your company’s unemployment tax obligations. 

In this article, we’re going to look at the critical components of unemployment tax law, discuss how current Coronavirus relief legislation modifies those existing rules, and establish a list of quality resources that you can turn to to get your important questions answered.  

Unemployment Tax: Key Things You Need to Know

Unemployment tax was first established under the Federal Unemployment Tax Act (FUTA) of 1939. This piece of legislation, which was created in response to the Great Depression, has evolved to address the modern workforce’s needs. The law was designed to offset unemployment’s social and economic impact by placing a portion of the cost onto employers in general. 

FUTA funds unemployment by collecting a payroll tax. However, it should be noted that this tax is only levied against you as a business owner, not against your employees’ paychecks. While the amount of tax that the federal government collects has changed over the years with updates to the legislation, the way that the tax is assessed has remained the same. Through 2020, the tax rate was set at 6% of the employee’s first $7,000 in wages per year. That means that the employer takes 6% from a minimal, predetermined amount rather than the employee’s overall salary. It should be noted that the tax is not assessed on employees who make $1,000 or less per calendar year. Tax is also not collected on employees aged 21 or under. 

The basic method for figuring out your company’s unemployment responsibility is:

  • $7,000 x 0.06= $420/employee/year
  • $420 x total number of employees= unemployment tax obligation

The current FUTA standard also makes a provision for a 5.4% tax credit, which results in a tax bill of $42 per employee every year. To qualify for the credit, your company must pay state unemployment tax and file form 940 (which is a yearly requirement anyway) with the IRS.  

The challenge to employers comes with state unemployment taxes, as every state administers its own unemployment program, and imposes an employer-funded tax levy. Below, we’ll provide a more comprehensive guide to available resources that can help you determine the rules for your particular state.   

When figuring your unemployment tax burden, you should inquire if certain types of payments are excluded from the overall calculation. Those types of payments include:

  • 401(k) contributions
  • Life Insurance
  • Fringe benefits and per diem payments
  • Childcare allowances

Employers are required to pay their unemployment tax quarterly throughout the year.

A Wrench in the Works: the CARES Act

Along with the COVID-19 pandemic, there came a surge in unemployment cases nationwide. At one point, the US economy suspended or eliminated more than 22 million jobs. Several legislative remedies were passed into law, including the FFCRA, which extended the definition of emergency paid leave. The CARES act offered additional unemployment insurance up to $600 dollars per week. There is an old saying, however: there’s no such thing as a free lunch. 

While the CARE Act served as a lifeline for many struggling families, there are tax implications to receiving that kind of governmental assistance. Employees who failed to set aside taxes might find themselves without their expected refund. 

For employers, the CARES act results in additional paperwork and due diligence. While the federal government fully funds the unemployment insurance itself, each state has its own mechanism for carrying out the program, complete with qualification requirements and reporting. The bottom line? Unemployment tax is already muddy water; pandemic-related legislation just opened the floodgates.  

Resources to Help

So the burden of understanding unemployment benefits and their associated tax burden falls to the employer. But with each state in charge of its own rules —on top of federal requirements— that’s no easy task. Information differs on a state-by-state basis, and even then, it can be difficult territory to wade through. Where to begin? 

The single best place to start your search is with the United States Department of Labor (DOL). They have a page set up specifically for employers that links to each state’s unemployment insurance program. This site gives employers a contact list at a glance and helps empower HR and accounting staff to find good, quality information on a state level.

To understand how unemployment insurance —including the CARES act— works for the employee, the DOL also offers a website geared toward the workforce filled with valuable information and necessary forms.  

For information on federal unemployment programs, the top-level governmental website, USA.gov, has an unemployment-related directory filled with information related to numerous national programs as well as additional high-quality resources. 

If, for some reason, the government-curated resources don’t answer your question, or you find them obtuse and difficult to use, numerous third-party organizations such as the Tax Foundation strive to bring up-to-date information to the American workforce, including employers. 

Enlisting Personalized Help

Understanding tax laws is difficult no matter what type of tax you’re working with. There is no substitute for getting advice from a professional resource. The Quentelle platform is proud to partner with the ValeU Group to provide unemployment tax planning services through our technology and consultancy expertise. For more information, please contact us today. 

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