Everything You Need to Know about Unemployment Tax for Small Businesses

Unemployment tax can be one of the most daunting taxes for many small businesses. Information is scant and it can seem you are at the mercy of the Unemployment Insurance Office in your state to know your rates and when you need to pay, not to mention understanding different regulations and laws. It’s many hoops to jump through but this article will help some light on this mysterious topic.

Unemployment insurance is a joint federal and state program to provide financial assistance for the unemployed. UI was created in the US in the Great Depression to get money into the hands of the unemployed so they could start spending money once again. People unemployed through no fault of their own are able to receive weekly cash benefits for a set period of time while actively looking for a job. It generally covers those who are laid off, but not those who quit.

Unemployment Insurance paid for by a two-part tax at the federal and state level. Generally, it is a tax paid by the employer, but some states have small employee contribution rates. There is a byzantine structure of tax rates that can be difficult to understand.

Benefits for Employees

The benefit for employees is readily apparent. By having a small weekly stipend to cover expenses while looking for a job, the financial shock of a layoff or other job loss is reduced. Employees can continue paying rent or car payments while searching for a new job. This provides not only microeconomic stability but macroeconomic stability as well.

Unemployment benefits vary from state to state. It further varies based on how much income employees earn in their base period. These can range from less than $200 a week to more than $700 a week. These benefits can last up to 26 weeks, but again this depends on the state. Generally, those states with higher tax rates, offer more benefits for employees.

Benefits for Small Businesses

The benefits for small businesses are not as easily seen. Many small businesses treat their employees like family. They care about them and often times the owner is the last one paid when times are tough. Layoffs are not something any small business wants to undertake because they know the turmoil is can cause in their employee’s lives. UI provides a cushion for employees when you have no other choice but to effect a layoff.

Unemployment Insurance Taxes

UI taxes consist of two different types:

• Federal UI Tax – 6% tax on base wages of $7000 per year.
• State UI Tax – varies by state from a fraction of 1% to 12%

It’s important to note that even within states, the UI tax rates can depend on the business type, whether it is a new business or not, and previous claim rates. Moreover, the tax base rates are different in different states. Business with more UI claims pay higher tax rates. Your state UI office will provide your business with its initial tax rate at the state level. Generally, there is one standard new employer tax rate.

One bright spot is that the Federal UI tax rate of 6% provides for a credit of 90% of the tax if the state UI tax is paid on time. This creates a huge encouragement to ensure that UI taxes are paid on time.

Procedure to Pay UI Taxes

Since UI tax applies at both state and federal levels, it’s important to make sure both are paid on time and correctly. You’ll use your Federal Employer ID (FEIN) to file your 940 Federal Unemployment Tax Return. You’ll need to contact your state UI Office to get your state filing identification number and find your tax rates. They’ll provide with the specific forms that you need to file and pay your state unemployment taxes. It’s important to ensure that these returns are timely filed and paid to ensure that your small business receives proper credit.

One important thing when setting up a UI account at the state level is to make sure that your company is classified in the correct industry. This ensures the lowest rates and ensures that your company has the correct tax profile.

How to Keep Tax Rates Low

As mentioned earlier, taxes can increase due to claims. Sometimes there is no choice, but often times claims can be reduced by taking the right actions. Document all HR interactions with employees. Ensure that you have a written paper trail when it comes to employee discipline. If you need to fire an employee, make sure you properly document the cause. If the employee disputes the termination with the UI Office then you’ll need to present your case to keep the employee from winning the claim and increasing your tax rates.

As you understand unemployment insurance more and more, you’ll see that the rates become a little easier to understand and you’ll find ways to better manage your tax expenses. This can help your small business become more profitable and serve its employees better.