Unemployment insurance is designed to protect workers, but it also creates real, ongoing obligations for employers — from payroll taxes to a rising tax rate every time a former employee successfully claims benefits. Here’s how the system actually affects a business, from the taxes that fund it to what happens when a claim lands on your desk.
How Unemployment Insurance Is Funded
Most of the cost of unemployment insurance is paid by employers, not employees, through two separate payroll taxes:
- FUTA (Federal Unemployment Tax Act): Every business owner pays this. It amounts to 6% of the first $7,000 each employee earns per calendar year, for a maximum contribution of $420 per employee annually.
- SUTA (State Unemployment Tax Act): How much a business owes depends on its number of employees, how much it has already paid into the state system, and how many former employees have successfully claimed benefits against it.
If your company has remote employees, note that you’re generally required to pay state unemployment taxes to every state where those employees actually work — worth checking with each relevant state’s labor office if your workforce is spread out.
There’s some overlap between the two taxes that works in employers’ favor: businesses that pay their state unemployment taxes on time and in full can typically claim a credit of up to 5.4% against their FUTA liability. That brings most employers’ effective FUTA rate down to just 0.6%.
How Claims Affect Your Tax Rate
Keeping employee turnover low isn’t just good for morale — it’s directly tied to cost. States assign each business an “experience rating,” and the more former employees who successfully claim unemployment against your account, the worse that rating gets, which pushes your SUTA rate higher over time.
In three states — Arkansas, New Jersey, and Pennsylvania — employees themselves are required to pay a small portion of state unemployment insurance taxes, but this is the exception rather than the rule; in most states, the tax burden falls entirely on the employer.
What Happens When a Former Employee Files a Claim
When someone you employed applies for unemployment, your business will typically receive a “Notice of Unemployment Insurance Claim Filed” from the state or federal agency. You’ll be asked to verify or correct details including:
- Whether the employee worked full-time, part-time, or not at all
- Why they left — laid off for lack of work, voluntarily quit, fired, or a trade/strike dispute
- Whether they refused an offer of employment
- Whether they’re legally authorized to work in the U.S.
- Whether they’re receiving other compensation, such as a pension or severance
If the claim is accurate, the recommended approach is simply to accept it. If it isn’t — for example, if the employee was fired for documented cause or left voluntarily — you have the option to contest it.
Contesting a Claim
Employers generally have around ten business days from receiving the notice to contest a claim, and missing that window can mean facing penalties or an automatic tax increase. Contesting requires submitting documentation that backs up your version of events — a performance improvement plan or disciplinary record, for instance — and in some cases attending a hearing where you’re interviewed about the facts.
Once a claim has been evaluated, both the employer and the former employee receive a “Notice of Determination” stating whether the claim was accepted. Even a denied claim can still be appealed by the former employee.
Grounds that typically disqualify a former employee from collecting unemployment include termination for:
- Theft
- Excessive unexcused absences
- Falsifying records
- Harassment
- Abuse of other employees
- Criminal behavior
Where SUTA Rates Actually Come From
It helps to understand the mechanics behind that “experience rating” mentioned above. Each state sets a range of possible SUTA rates — new employers typically start at a standard new-employer rate before the state has enough claims history to calculate an individualized rate. From there, your rate moves within the state’s range based largely on how many former employees have drawn benefits charged to your account relative to how much you’ve paid in. A business with almost no turnover and no successful claims will typically drift toward the bottom of its state’s range over time; a business with frequent layoffs or terminations that generate approved claims will drift toward the top. Because these ranges and the specific formulas vary significantly by state, there’s no single “average” SUTA rate — it’s worth checking your own state labor department’s published rate table rather than relying on a national figure.
A Bit of History
Unemployment insurance in the U.S. dates back to the 1930s, created as part of the broader social safety net response to the Great Depression. The basic structure — a joint federal-state system funded through employer payroll taxes, with states administering their own claims and setting their own tax rates within federal guidelines — has stayed largely the same since. That’s part of why the specifics (tax rates, waiting periods, disqualification rules) differ so much state to state even though the underlying purpose is consistent everywhere: a temporary bridge for workers between jobs, funded primarily by the employers who did the laying off.
Keeping Your Unemployment Costs Down
Because claims history directly drives your SUTA rate, the practical takeaway for employers is largely about documentation and consistency: apply workplace policies the same way across your team, document performance issues as they happen rather than after the fact, and keep clean records of separations — payroll records, schedules, attendance logs, performance reviews, disciplinary notices, and resignation letters — so you’re ready to respond quickly if a claim does need to be contested.
Where to Go for State-Specific Rules
Because unemployment insurance is administered at the state level, the exact SUTA rate, contestation deadline, and disqualification criteria that apply to your business depend entirely on where your employees are located. Each state’s labor or employment security department publishes its current rate tables, claim forms, and appeal procedures — that’s the authoritative source rather than any national average, since rates and rules genuinely differ from state to state. If you employ people in multiple states, expect to track separate accounts, deadlines, and correspondence for each one.
FAQ
Do employers have to pay unemployment taxes?
Yes. Nearly every employer pays both federal (FUTA) and state (SUTA) unemployment taxes, though the specific rates and rules vary by state.
Can a fired employee still collect unemployment?
It depends on the reason for termination. Workers let go for misconduct or a clear policy violation are generally ineligible; those laid off for lack of work or a facility closing are typically eligible.
What is a benefit charge?
It’s the portion of a former employee’s unemployment benefits that gets assigned to a specific employer’s account, based on state rules and the reason for separation.
Do I have to respond to a claim notice?
Yes, and usually within a set deadline. Not responding can hurt your tax account or increase the odds that benefits get charged to your business even if the claim wasn’t fully accurate.
What records should employers keep to prepare for potential claims?
Payroll records, work schedules, attendance logs, performance reviews, disciplinary notices, resignation letters, and separation paperwork.
Does contesting every claim lower my unemployment taxes?
Not necessarily — contesting a claim only helps when the claim is genuinely inaccurate or the former employee doesn’t meet eligibility rules. Contesting a valid claim just wastes administrative time, since the state will approve it after review regardless.
What’s the practical difference between FUTA and SUTA?
FUTA is a flat federal tax that mostly funds unemployment program administration at the federal level, while SUTA is the state-level tax that actually funds the benefits paid out to claimants — and SUTA is the one that rises or falls based on your specific claims history.