If you run a company with employees, you are legally required to have unemployment insurance. We're here to walk you through a crash course about what it is, why you need it, and how it's billed.
Looking for a comprehensive overview? Download a free guide on unemployment insurance to make sure you're staying compliant.
How State and Federal Unemployment Insurance Works
SUI = State Unemployment Insurance
State Unemployment Insurance (SUI) is an employer-funded program required by both state and federal law. The insurance pays unemployed workers benefits while they are looking for work. SUI is required by law, and every state that you have an employee in will require you to have a SUI number and pay for state unemployment insurance.
The Difference Between Federal and State Requirements
You need SUI to protect your employees should you ever have to terminate their employment. SUI subsidizes the individual’s income while he or she finds another job. The federal government regulates the insurance, but the individual states determine the unemployment benefits your employee may receive. Both federal and state income taxes fund the program, but they do so under different names. Federal unemployment insurance benefits are withheld under FUTA (the Federal Unemployment Tax Act). State withheld insurance is typically referred to as SUI, and it’s required at both levels as your company grows.
Related article: What is the FUTA Tax?
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How Much It Costs: Federal
On the federal level, employers report their FUTA tax by filing an annual Form 940 with the Internal Revenue Service. The FUTA imposes a 6.0% tax on the first $7,000 of gross earnings of each worker per year (NOTE: in reality, it is generally 0.6%, because you get credits for paying SUI). Once the worker's earnings reach $7,000 during a given year, the employer is no longer responsible for any further Federal unemployment tax for that year. You'll need to research if there are credits allowed with respect to state unemployment taxes paid, that may reduce your FUTA rate.
How Much It Costs: State
At the state level, there are two components to how SUI tax is calculated: “Wage base” and rate. Wage base is the maximum amount of earnings that can be taxed in a given calendar year. This is established on a per-state basis and may change from year to year.
Your SUI tax rate is determined based on how many of your former employees have filed an unemployment claim in the past. New companies are taxed at a “new employer” rate and then the rate is updated on an annual basis by the state based on unemployment claim activity. New employer rates generally range from 2-4%.
Example: You have an employee in New York. Your company’s New York SUI rate is 3% and New York’s wage base is $10,000. If you pay an employee $10,000 in a calendar year then you will be taxed $300, which is 3% of the first $10,000 that the employee earns. If the same employee earned only $5000 in a calendar year then you would be taxed $150, which is 3% of $5000.
How To Cover All of Your Bases
- You must register with each state you have employees in.
- You must register for SUI, file a SUI report on all your employees, and pay for SUI quarterly (you usually pay with your withholding taxes).
- You must report your FUTA tax by filing an annual Form 940 with the Internal Revenue Service.
Want Someone To Do All Of This For You?
With Justworks, your SUI tax is automatically included as part of your payroll taxes. State and federal unemployment insurance (tax) is automatically calculated and charged as an employer tax. Justworks will collect and remit these funds electronically and file your unemployment return on your behalf.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.