small business owner reviews unemployment insurance options

Does My Small Business Need to Pay Unemployment Insurance Tax?

Unemployment insurance tax is a federally mandated program that most employers must pay. You must pay this tax if you

  • paid at least $1,500 in employee wages in the current or previous calendar year, or
  • had one or more employee for at least part of a day in any 20 or more different weeks in the current or previous calendar year.

This tax is mandated under the Federal Unemployment Tax Act (FUTA) but is regulated by each state. The funds you pay are used to give former employees some financial security if they are laid off.

Federal and State Unemployment Tax Amount

There are two types of unemployment insurance taxes: federal unemployment insurance and state unemployment insurance (SUI).

Federal Unemployment Insurance

The federal unemployment insurance rate is 6% of the first $7,000 you pay each employee every year. Most employers, however, will qualify for a 5.4% tax credit, making their federal rate 0.6%.

Most unemployment benefits claims are paid by the state, but if the state does not have enough in their fund to pay, then they can borrow funds from the federal unemployment fund. If your state doesn’t pay back the loan within two years, then you might not qualify for the full tax credit. When that happens, your state is considered a “credit reduction state”, and your total federal tax liability will increase. Credit reduction states are listed in the instructions for Form 940.

State Unemployment Insurance

Each state sets its own unemployment insurance rates. Before you hire your first employee, you’ll register for an account with your SUI agency, and they’ll tell you your tax rate. It will often depend on your industry, how long you’ve been in business, and the number of unemployment claims made by former employees.

You’ll pay SUI taxes to your employee’s state of residence. So, if your business is in Georgia, but you employ a worker who lives in South Carolina, you would pay unemployment insurances taxes to South Carolina.

Who pays unemployment insurance tax?

Only employers pay FUTA taxes, and, typically, SUI taxes. If your employees live in Alaska, New Jersey, or Pennsylvania, you may be required to withhold a portion of SUI from their paychecks.

When do I pay federal unemployment insurance tax?

Federal unemployment insurance taxes are due on the last day of the month following the end of the quarter (April 30, July 31, October 31, and January 31). You will need to pay these taxes any time your liability exceeds $500 in a quarter. If your liability is $500 or less, then roll the amount over to the next quarter. If your liability is still $500 or less in the fourth quarter, then you can make your payment with Form 940. Click here to learn more about Form 940.