Purpose of Unemployment Insurance Program :

The Unemployment Insurance program plays a key role in helping businesses, communities, and the nation's economy. It was created in 1935 in response to the Great Depression, when millions of people lost jobs. They couldn't buy goods and services, which contributed to more layoffs.

Now, as then, the program helps cushion the impact of economic downturns and brings economic stability to communities, states, and the nation by providing temporary income support for laid-off workers.

Employer Coverage :

Unemployment Insurance (UI) is a federal-state program jointly financed through federal and state employer payroll taxes (federal/state UI tax). Generally, employers must pay both state and federal unemployment taxes if: (1) they pay wages to employees totaling $1500, or more, in any quarter of a calendar year; or, (2) they had at least one employee during any day of a week during 20 weeks in a calendar year, regardless of whether or not the weeks were consecutive. However, some state laws differ from the federal law and employers should contact their state workforce agencies to learn the exact requirements.

Federal Unemployment Tax :

The Federal Unemployment Tax Act (FUTA), authorizes the Internal Revenue Service to collect a federal employer tax used to fund state workforce agencies. Employers pay this tax annually by filing IRS Form 940. FUTA covers the costs of administering the Unemployment Insurance and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits. Form 940…

State Unemployment Insurance Tax :

Employers liable under the Employment Security Law are required to pay unemployment taxes to the state. Unemployment insurance is a tax paid by the employer without deduction from the wages of any employee. These taxes are deposited in the State Unemployment Trust Fund. Monies from this fund are used to pay unemployment benefits to those eligible under Employment Security Law requirements.

How are Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA) Related ?

The FUTA tax rate is 6.2% of taxable wages. The taxable wage base is the first $7,000 paid in wages to each employee during a calendar year. Employers who pay the state unemployment tax, on a timely basis, will receive an offset credit of up to 5.4% regardless of the rate of tax they pay the state. Therefore, the net federal tax rate is generally 0.8% (6.2% - 5.4%). State tax rates are based on requirements of state law.

State Taxes :

All states finance Unemployment Insurance Compensation primarily through contributions from subject employers on the wages of their covered workers. In addition, three states ( Alaska , New Jersey , and Pennsylvania ) collect contributions from employees. These taxes are deposited by the state to its account in the Unemployment Trust Fund in the Federal Treasury, and are withdrawn as needed to pay benefits.

Quarterly Reports and Unemployment Tax :

Covered employers are required to file a report after the end of each calendar quarter listing all wages paid during the quarter. The report generally consists of two parts An Employer's Unemployment Quarterly Tax Report, and an Employer's Quarterly Wage Detail Report,

The Employer's Unemployment Quarterly Tax Report is used to report total wages paid by the employer so that the unemployment tax can be computed. This report must be filed after the end of each quarter until the business is sold transferred or discontinued, or until the employer no longer meets the liability requirements. Wages are taxed at a rate assigned at the beginning of each calendar year based on the employer's employment experience record. The tax is due on the last day of the month following the end of each calendar quarter.

The Employer's Quarterly Wage Detail Report must also be filed after the end of each quarter. It is used to report information for each employee including name, Social Security number, total wages paid during the quarter, and the number of hours worked during the quarter. Employers are encouraged to file magnetic media and those with 50 or more employees are required to do so. Employers with fewer than 50 employees may choose to file on paper.

Experience Rating and the Federal Requirements :

The system under which employers are assigned tax rates in accordance with their individual experience with unemployment (and subject to the needs of the state program) is referred to as experience rating.

State Taxable Wage Base and Rate :

Many states (42) have adopted a higher tax base than the $7,000 now provided in FUTA. For 2005, Hawaii 's wage base is the highest at $32,300. In all states, an employer pays a tax on wages paid to each worker within a calendar year up to the amount specified in state law. In addition, most of the states provide an automatic adjustment of the wage base if federal law is amended to apply to a higher wage base than that specified under state law.

Maintaining Adequate Records :

All employers must maintain records for each person they employ (including corporate officers). These records must show :

• The employee's name and social security number.
• The beginning and ending dates worked.
• The amount of wages paid.
• All other payments made to the employee including vacation pay, tips and the reasonable value of board and lodging or other remuneration for services.