Who Pays Unemployment Taxes? Employers vs. Employees

Unemployment taxes are a fundamental component of the economic safety net in the United States. They provide temporary financial assistance to eligible workers who lose their jobs through no fault of their own. These taxes collectively fund the unemployment insurance system, offering stability during periods of joblessness. The system operates through a combination of federal and state programs.

Employer Federal Unemployment Tax Obligations

The Federal Unemployment Tax Act (FUTA) establishes a federal tax employers pay to fund the unemployment insurance program. An employer is generally subject to FUTA if they paid wages of $1,500 or more in any calendar quarter, or had at least one employee for 20 or more weeks in a year. This tax applies to the first $7,000 paid in wages to each employee annually, known as the FUTA wage base.

The standard FUTA tax rate is 6.0% of these taxable wages. Employers can receive a credit against their FUTA tax liability by paying state unemployment taxes in full and on time. This credit can reduce the effective federal tax rate by up to 5.4%, bringing the net FUTA tax rate down to 0.6% for most employers. The maximum FUTA tax an employer usually pays per employee is $42 annually ($7,000 wage base multiplied by 0.6%). If a state has outstanding federal loans for unemployment benefits, employers in that state may face a FUTA credit reduction, increasing their effective FUTA tax rate.

Employer State Unemployment Tax Obligations

In addition to federal obligations, employers pay State Unemployment Tax Act (SUTA) taxes, distinct from FUTA. These state-specific taxes, also known as State Unemployment Insurance (SUI), fund their state’s unemployment compensation program.

SUTA taxes use an “experience rating” system to determine an employer’s specific tax rate. This rating is based on the employer’s history of unemployment claims. Employers with fewer claims typically receive a lower SUTA tax rate, while those with more claims may face higher rates. New employers generally begin with a standard, often higher, state-determined rate until they establish an experience rating, which usually takes a few years.

Employee Contributions

In most U.S. states, employees do not directly pay unemployment taxes. These taxes are primarily funded by employers, both federally and at the state level. This employer-only nature distinguishes them from other payroll taxes, such as Social Security and Medicare, which are typically shared.

A few states, such as Alaska, New Jersey, and Pennsylvania, require minimal employee contributions to their state unemployment insurance programs. These are exceptions, as the unemployment insurance funding system primarily relies on employer contributions.

Paying Unemployment Taxes

Employers fulfill FUTA tax obligations primarily through quarterly electronic deposits to the Internal Revenue Service (IRS) via the Electronic Federal Tax Payment System (EFTPS). FUTA tax liability for a quarter must be deposited by the last day of the month following that quarter, provided the liability exceeds $500.

In addition to quarterly deposits, employers must file an annual Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, with the IRS. This form is generally due by January 31 of the year following the tax year. For SUTA taxes, employers remit payments directly to state unemployment agencies. These payments are commonly made quarterly, and employers must file state-specific unemployment tax reports according to state deadlines and procedures.