Whether it's due to poor performance or lack of business, letting employees go is a difficult part of running a business. In addition, it is often unclear what responsibilities employers have regarding unemployment insurance. The following is information on what happens when an employee is laid off or furloughed, how claims are paid, and how it affects taxes.
How Do Unemployment Benefits Work?
Unemployment insurance (UI) provides income to workers who have lost work due to a factor beyond their control. This includes layoffs, furloughs, or the end of seasonal work. Former employees receive a set percentage of their average annual pay and collect benefits for 26 weeks in most states.
What Happens When a Former Employee Files a Claim?
Employees who have been laid off or furloughed file an unemployment claim in their home state. The former employer is notified of the claim. The employer validates it by providing details such as:
- If the employee works full-time, part-time, or not at all.
- Why the former employee left - did they voluntarily quit, or were they laid off?
- If the unemployed worker refused employment.
- If the former employee is receiving compensation, such as a pension or severance pay.
These questions allow the state to determine if the claimant is eligible for unemployment insurance benefits. Reasons a worker would be ineligible for unemployment benefits include:
- The worker was fired for misconduct.
- The employee voluntarily resigned. The exception to the resignation rule is when employees quit due to intolerable circumstances, such as dangerous work conditions. Workers who resign for urgent, compelling reasons will be eligible for unemployment benefits.
- The claimant was an independent contractor, not an employee.
- The claim is unemployment fraud.
Here is how to review the claim to verify details:
- See if the person on the claim was or is an employee. This excludes independent contractors and staffing agency employees.
- Verify the report's data, such as wages, employment dates, severance, and vacation payout.
- Confirm the details that led to the claim. This includes the reason for termination. In some cases, employees are eligible for partial unemployment if they have gone from a full-time to a part-time worker.
If the claim is valid, accept it. However, if the employee left voluntarily or the claim is misleading, you can contest it.
How to Contest an Unemployment Claim
If a former employee files an inaccurate unemployment claim, contest it within 10 days to avoid penalties or possible tax increases. If you fail to respond promptly, the claim will be paid.
When you contest a claim, the state may contact you for more information. You may also be asked to appear at an unemployment benefits hearing.
Be prepared to present proof when contesting a claim for an employee who was fired for a good cause. Gather documents such as:
- Attendance records
- A letter of resignation
- Any disciplinary actions relevant to the termination
- Additional documentation of events that led to the termination
Review the law in your state to determine if you have a strong case. Contesting an unemployment claim brings a risk the former employee will file a wrongful termination lawsuit. In some situations, there is no benefit to contesting a claim.
The state will send a "Notice of Determination" to you and the employee to show if the claim was accepted. Even if you win the determination, the employee can appeal the decision.
What If an Employee Worked in Multiple States?
In some cases, an employee covers a territory and works in multiple states. In which state would they file for unemployment benefits States look at four factors to determine the home state:
- The primary state where the employee works
- The office where the employee reports to work or the home state to the main office
- The employer's main location that directs the operation
- The state where the employee lives
Are Employers Required to Pay Unemployment Insurance?
Understanding how unemployment claims are funded helps businesses keep costs down. Many people assume that employees pay into the unemployment system. However, only three states, Alaska, New Jersey, and Pennsylvania, require employees to contribute. For everyone else, unemployment insurance funds come from state and federal taxes that businesses pay as part of their payroll taxes.
Employers in every state pay Federal Unemployment Tax Act (FUTA) taxes. This is a 6% federal payroll tax on the first $7,000 each employee earns in a calendar year. Thus, the maximum employers pay $420 per employee. However, after claiming a tax credit of 5.4%, the effective FUTA tax rate decreases to 0.6%. That means a maximum tax of $42 per worker applies each year.
Payments to FUTA finance the federal unemployment insurance (UI) trust fund. The UI fund covers the cost of administering unemployment insurance programs and the loans made to state UI funds. It also splits the cost of extended unemployment benefits offered during periods of high unemployment.
Because of the coronavirus pandemic, the federal government launched programs to protect the economy and unemployed workers. These laws expanded eligibility and extended benefit duration. In addition, the weekly benefit amount increased. Still, some programs ended in 2020. All remaining expanded benefits will phase out completely by August 31, 2021. The federal government funded these enhanced unemployment programs.
Employers' payroll taxes also fund state UI programs through the State Unemployment Tax Act (SUTA). Each state uses its own formula to determine the taxable wage base and salary subject to tax. The minimum state wage base allowed must equal the federal base of $7,000 per employee. In the U.S., the state with the highest wage base is Hawaii, at $47,400.
States assign a tax rate to an employer based on the company's experience rating. This rating can go up or down each year. A company with a large number of claims pays a higher rate than one with few UI claims. So the current tax rate is based on the number of past benefit charges from ex-employees. Other factors include the amount the company has paid into the UI system and the employer's taxable payroll.
For additional information on rules concerning unemployment taxes in your state, contact your state government labor office.
Nonprofit organizations are allowed to opt out of the unemployment tax systems. As a result, more than 100,000 501(C)(3) organizations have chosen not to pay federal or state UI taxes. Instead, they reimburse the state for unemployment claims paid on the organization's behalf. Taking the reimbursement approach saves nonprofits an average of 30% to 60% of what they would pay in-state unemployment taxes.
What Do Unemployment Claims Cost?
The average cost of an unemployment claim is $4200, but claims can cost up to $12,000 or more. The amount varies based on the claimant's former salary, length of time on unemployment, and the state's maximum benefit amount.
Do Small Businesses Have to Pay for Unemployment Insurance?
If you run a small business, you may wonder if you are subject to payroll tax laws. According to IRS guidelines, you are subject to FUTA tax on the wages you pay if:
- You paid wages of $1,500 or more to employees in any calendar quarter during 2019 or 2020.
- You had one or more full-time or part-time employees work at least part of a day in 20 or more different weeks in both 2019 or 2020.
- You had a household employee or farmworker who is your employee.
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Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a tax attorney to ensure you're meeting state and federal requirements.