State unemployment taxes are designed to insulate employees from the effects of layoffs or other unemployment scenarios.
Although the unemployment tax system is administrated by states, employers have an important role to play in the process
Unfortunately, unemployment benefits have been the cause of no small amount of confusion for small business employers. On the one hand, employers want to live up to their obligations to their employees and state law. But at the same time they want to avoid overpaying or participating carelessly in the unemployment tax process.
Who pays for unemployment benefits?
Do we really even need to answer this question? Of course, it's the employers who pay for their workers unemployment benefits. But the manner in which you pay is different from any other payroll-related expense. Unemployment benefits are paid directly from the state unemployment account – which is funded by the unemployment taxes paid by employers.
How much does unemployment tax cost?
Unemployment taxes are variable and are based on how often your company's unemployed workers dip into the unemployment benefit system. Some industries (e.g. construction) are more prone to the withdrawal of unemployment benefits than others.
To determine the amount of unemployment tax your business will pay, the government relies on something they call an "experience rating". Your experience rating is based on the five year track record of unemployment benefits for workers have received.
So a simplified overview of the unemployment tax system looks something like this: When an employee collects unemployment benefits, it increases his employer's experience rating. Over the next five years, the employer pays back the benefits that have been received by his laid-off employees plus an extra amount that stays in the state's unemployment fund to cover unfunded benefits and other expenses.
Who is required to pay unemployment tax?
Everyone . . . All privately-owned business owners are required to pay unemployment tax. The only exceptions are nonprofits and public employers. Although these employers still have to pay unemployment tax, they are only required to pay the actual amount withdrawn by their workers rather than paying additional funds to pad the states unemployment reserve account.