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What is an Unemployment Insurance Tax?

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  • Written By: Florence J. Tipton
  • Edited By: John Allen
  • Last Modified Date: 27 November 2018
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Unemployment insurance tax is a federally mandated tax in the U.S. to fund programs and unemployment benefits for workers who are out of work due to no fault of their own. Administered by the federal labor department and state workforce agencies, the unemployment insurance tax is paid with payroll taxes from employers. In other countries, labor unions and workers might fund unemployment insurance with or without government involvement. Workers in other countries may receive health care and other resources while unemployed in addition to unemployment benefits.

Companies that hire workers in the U.S. are typically required to pay an unemployment insurance tax. The unemployment tax is paid separately to federal and state entities. In general, companies that pay a predetermined minimum amount of wages to employees within one calendar year must pay into both funds. On average, this tax is determined by the type of employment for which the workers are hired. The number of workers and how many file for unemployment benefits may also factor into assessing employers’ tax rates.

There are various types of employment that may determine how much is paid by the companies. Wages for domestic workers who usually work as caretakers in a private residence are subject to the unemployment insurance tax. Companies that employ workers on farms are also expected to pay unemployment taxes to the federal program. The amount typically required by the state labor department varies based on the tax rate in the respective state.

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The Federal Unemployment Tax Act (FUTA) sets the standard amount that each U.S. employer is expected to pay, usually with quarterly payments. The amount of earned wages subject to the unemployment insurance tax is dependent on the tax rates set by the Internal Revenue Service (IRS). The tax money collected is used to fund state workforce agencies and may change with tax code changes.

State unemployment insurance tax may vary from state to state. A business owner may want to check for specific requirements to be in compliance. Not paying the correct rate could lead to penalties and interest payments in excess of the standard tax rate owed.

The amount of unemployment insurance tax collected by the state is only used to pay unemployment benefits to a worker who qualifies to receive benefits. Usually, the worker was laid off or terminated due to circumstances beyond his or her control. Taxes collected for the federal fund are used to cover the administrative costs of various worker re-entry and job training programs offered by state workforce agencies. Additionally, the federal portion of the tax contributes to half the cost for extending unemployment benefits when necessary.

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