Actually employees pay into it, the employers match it, and the government chips in.
Wrong buddy.
What Does an Unemployment Claim Cost an Employer?
Many people mistakenly believe that unemployment insurance (UI) benefits come from a fund paid into by employees—like Social Security or Medicare. However, it’s employers who are financially responsible for unemployment benefits, and the costs are far higher than just the amount of a claim.
First, it helps to understand how unemployment insurance is financed.
Unemployment is almost entirely funded by employers. Only three states—Alaska, New Jersey and Pennsylvania—assess unemployment taxes on employees, and it’s a small portion of the overall cost.
Unemployment is funded, and taxed, at both the federal and state level:
The Federal Unemployment Tax Act (FUTA) tax is imposed at a flat rate on the first $7,000 paid to each employee. The current FUTA tax rate is 6%, but most states receive a 5.4% “credit” reducing that to 0.6%. There is no action an employer can take to affect this rate. Some of this federal money is used for loans to states that don’t have enough in their UI trust funds to pay claims. If the loans are not repaid, the federal government raises that state’s employer tax rate.
The State Unemployment Tax Act (SUTA) tax is much more complex. Employers pay a certain tax rate (usually between 1% and 8%) on the taxable earnings of employees. In most states, that ranges from the first $10,000 to $15,000 an employee earns in a calendar year.
Here’s where it gets tricky. Each state has its own finance method and its own calculation to determine the tax rate an employer pays. You can read about that here. For the purposes of this article, know that the tax is based on the employer’s taxable payroll, the amount the employer has paid into the UI system, and unemployment claims against the employer’s account (called “benefit charges”).
This is called an experience rating, and it can go up or down over time depending on the employer’s payroll and history with unemployment claims.
