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Everything You Need to Know About Unemployment Contribution Rates

By: Dave Ignaski, Payroll Tax Manager

The concept of unemployment contributions rates can be tricky. For starters, not all 50 states even use that term. Some call them Unemployment Insurance while others use Unemployment Compensation. Regardless, all mean the same thing – a state-administered tax that is collected to provide a source of income for any eligible person who is temporarily unemployed by no fault of their own (typically those fired for cause are not eligible).

Each year, businesses are provided with a new state unemployment contribution rate unique to their business. These new rates are based on many factors, which may include:

  1. The state;
  2. The number of former employees who have opened unemployment claims;
  3. How long these employees worked at the company; and
  4. How promptly the employer responded to the claims.

What is my specific unemployment contribution rate?

The only way to know your specific rate is to keep an eye out for the tax notice outlining details. Most states mail this notice out at the beginning of the year. If you don’t receive a notice, you should contact your state tax agency.

In some instance, we’re able to connect directly with the appropriate state agency to collect new rates. However, we still ask our customers to send over their new rates to 1.) help ensure that we have the most up-to-date information and 2.) because not all states have a system in place allowing us to get your new rates.

What should I do with my unemployment contribution notice?

If you work with a payroll provider, you’ll need to provide them with the notice so that they can update their records to ensure they’re taking out the proper tax amount. Failing to notify your provider will most likely result in them using the previous year’s rate. Doing so means that you (the employer) are at risk of significantly over or under paying taxes.

If you don’t work with a payroll provider, you’ll still need to hold onto this notice to help ensure you’re taking out the appropriate amount of taxes per employee.

How are unemployment contribution rates used?

Once a business is given their unemployment contribution rate, they then need to apply it to a state-determined wage base to calculate the Unemployment Taxes owed by the employer.

For example, let’s assume New York’s wage base is $9,750, meaning the tax rate only applies to the initial $9,750 of every employee’s yearly salary and wages. If we assume that an employer has a state unemployment tax rate of 5%, then the maximum tax cost per employee will be $487.50 ($9,750 x 5%).

Looking at it from a company standpoint, let’s assume XYZ Co has three employees. In 2017 Employee 1 earns $20,000, Employee 2 earns $50,000, and Employee 3 earns $5,000. In this case, XYZ Co is on the hook for the total of $1,225.

Employee 1 $9,750 x 5% = $487.50
Employee 2 $9,750 x 5% = $487.50
Employee 3 $5,000 x 5% = $250.00
Total for 2017 = $1225.00