Who Pays for Unemployment? Learn the Costs, Eligibility, and How It Works

Letting an employee go is never an easy choice, but it’s one that many businesses face each year. As of November 2023, the US unemployment rate is 3.7%, which translates to roughly 6.3 million people. And while not every person without a job receives benefits, the unemployment program has paid out well over $26.87 billion throughout 2023.

Employers lay off workers for any number of reasons. From downsizing and restructuring to closing for the season, it’s sometimes unavoidable. When this happens, it’s crucial for those workers to have a safety net to fall back on.

What does this mean for your organization? Understanding how unemployment works and your responsibilities to the program are fundamental parts of business ownership.

The BambooHR® Platform makes it easy for organizations to handle everything from payroll to the overall employee experience. In this article, we’ll take an in-depth look at the unemployment program, who pays for unemployment insurance, and how it affects your business’s bottom line.

How Does Unemployment Work?

Established during the Great Depression in the 1930s, the US unemployment system is a lifeline for workers and their families facing financial hardship after losing a job. When someone is out of work for reasons beyond their control, they can receive a dependable source of income until they find a new job and start earning a regular wage again. Like other social programs, unemployment benefits help people:

• Combat food insecurity
• Maintain rent or mortgage payments
• Pay utility bills on time
• Prevent adverse health outcomes

On a broader scale, unemployment also helps stabilize the economy. It provides a way to maintain spending and protect against sharp declines during recessions and historic events like the COVID-19 pandemic in 2020.

Unemployment Insurance (UI)

Jointly administered by the US Department of Labor and individual states, unemployment is also known as “unemployment insurance.” In accordance with federal law, state regulations shape several aspects of the program, including:

• Unemployment eligibility requirements
• How much each unemployed worker gets paid
• Benefit maximums per person

It’s typically granted to those who are not working at all, but some states also have a partial unemployment system. Subject to working hours and earnings limitations, it helps part-time employees make ends meet until they secure a full-time job again.

Additional Unemployment Programs

UI is a general benefit program for most US workers. However, additional assistance is available for those in unique circumstances:

• Disaster Unemployment Assistance (DUA) Program: Funded by the federal government, DUA supports people whose jobs ended because of a major disaster but who don't qualify for regular UI.
• Unemployment Compensation for Ex-servicemembers (UCX) Program: This program supports eligible ex-military personnel as they transition from the military to civilian life. Individual states pay out UCX benefits on behalf of the federal government.

Who Pays for Unemployment?

Unemployment benefits are funded by the Federal-State Unemployment Insurance Program and paid for by employer taxes. Collectively, state and federal taxes are pooled together to finance the program and support eligible workers via check, direct deposit, or debit card.

Understanding the State Unemployment Tax Act (SUTA)

The State Unemployment Tax Act (SUTA) requires employers to pay into their state’s unemployment fund. In most states, only the employer pays this tax. However, employees in Alaska, New Jersey, and Pennsylvania share this responsibility with their employers.

Each state determines its SUTA tax rate, and organizations with workers in multiple locations must comply with their employees’ state regulations. This rate is calculated based on several factors, such as payroll size, contributions already made to the UI program, and the number of former employees claiming benefits.

Understanding the Federal Unemployment Tax Act (FUTA)

The Federal Unemployment Tax Act (FUTA) requires businesses to pay into the UI program. Employers fill out IRS Form 940 to pay this tax, which goes toward:

• Administrative fees associated with UI and state-level job service programs
• Half the cost of extended benefits (during peak unemployment periods)
• Reserves from which states can borrow to pay out benefits

This tax equals 6% of the first $7,000 in wages paid to each employee annually. However, employers typically receive a 5.4% credit, resulting in a net 0.6% tax rate. This tax credit is applied if the employer paid their taxes on time and the state repaid the money it borrowed from the federal government to pay UI benefits.

How Much Are Unemployment Benefits?

Benefits aren’t distributed at a flat rate to unemployed workers—they’re calculated based on a percentage of their earnings. As of October 2023, the average weekly benefit amount is $433.24 with the lowest in Puerto Rico at $209.42 and the highest in Washington at $726.93.

There’s also a cap on how long someone can receive benefits. This time frame varies, but most states provide support for up to 26 weeks. Extended UI benefits may be available in certain cases.

How Unemployment Is Calculated

UI is typically calculated based on the worker’s earnings over 52 weeks up to the state maximum. Each state follows its own guidelines for determining unemployment benefit amounts but many make it easy for workers to estimate how much they’ll get.

For instance, Pennsylvania has a chart that outlines the weekly benefit rate and New York has a UI calculator.

Is Unemployment Taxed?

Unemployment compensation is subject to federal income tax and must be reported on the worker’s tax returns. Workers in states without income tax don’t have to worry about a separate levy. In states with income tax, unemployment income is treated differently depending on the location.

Unemployment Eligibility

Of all the people who don’t have a job in the US, most don’t collect UI benefits. Eligibility requirements for unemployment vary by state, but generally, a person must have earned enough wages during a specific timeframe (or base period) to qualify. For instance, many states require continuous employment for the previous 12–24 months.

Eligibility is also determined by the circumstances behind a claimant’s current employment status. You must prove you’re unemployed through no fault of your own and are ready, willing, and able to work.

You're eligible for unemployment if:

• You’ve been laid off due to lack of work.
• Your company downsized or closed.
• Your position was eliminated.
• Your temporary/seasonal employment ended.
• You resigned to follow your spouse to their new work location.
• You’re actively job searching.

Generally, you can’t claim unemployment benefits if you quit your job. This only happens if you quit due to unsafe working conditions, harassment, pay reduction, and other situations that make staying with an employer difficult. Family emergencies and other personal events may also support a benefit claim.

You're not eligible for employment if:

• You’ve been let go from your previous job due to “gross misconduct” (e.g., theft, harassment).
• You quit your previous job without just cause.
• You don’t intend to work.

Additionally, most freelancers, independent contractors, and self-employed professionals are ineligible. Certain exceptions apply, but if you haven’t paid into the program, you can’t receive the benefit.

How to File for Unemployment

As soon as a worker becomes unemployed, they reach out to their state unemployment agency. Filing for unemployment is a fairly straightforward process that can be done online or over the phone. The worker will need to provide some information, such as:

• Social security number, driver’s license, or another ID
• Mailing address
• Telephone number
• Dates of employment
• Gross income
• Former employer’s contact information
• Reason for separation from an employer

Claimants usually start receiving benefits a few weeks after filing. To continue to receive support, they must file weekly or biweekly claims that confirm they’re still eligible.

How Unemployment Claims Affect Businesses

Business contributions to the UI program are largely financial, but you have other responsibilities, too. Here’s how the process breaks down from an employer’s perspective:

1. A former employee files a claim with their state’s unemployment agency.
2. The state notifies the employer about the claim and its details (e.g., wages, employment dates, reason for leaving).
3. The employer confirms or contests the claim based on the facts in the notice.

Confirming the claim proves its validity and sets the process in motion, allowing your former employee to receive benefits. Contesting an unemployment claim confirms it’s inaccurate or misleading. To contest a claim, you must:

• Respond to the state unemployment office by the deadline listed in the notice.
• Collect documentation that proves your case (e.g., letter of resignation, just cause for firing).
• In some cases, you’re required to attend a hearing to be interviewed about the claim.

When the process is complete, the state agency will send you a Notice of Determination. This verifies whether they’ve accepted or denied the employee’s claim to benefits. If denied, the employee may appeal the resolution.

Approved claims will likely affect your employer experience rating (the probability former employees will file for UI benefits), which influences your SUTA tax rate. Businesses with more former employees who receive UI benefits generally make greater contributions than those with fewer. A more favorable rating can also affect your FUTA taxes.

For seasonal employers where mass layoffs are unavoidable, higher taxation is likely inevitable. However, organizations that continuously run throughout the year can take steps to ensure healthy levels of employee retention, satisfaction, and policy compliance.