Each state operates its own unemployment compensation program
that is funded largely by taxes on employers. So, if you have employees,
you should expect to pay some state unemployment taxes. These
taxes are in addition to any federal
unemployment tax you may owe.
For the most part, state unemployment taxes are imposed
directly on employers and you don't withhold
these taxes from your employees' wages. Currently only one
state, Alaska, also assesses unemployment taxes on employees. If
you happen to have employees in Alaska, you will also be
withholding some unemployment taxes from your employees' wages.
Small employer exemptions. In most of the states, if
you're subject to the federal unemployment tax (i.e., you have
at least one employee for 20 calendar weeks during the current
or preceding calendar year, or you pay at least $1,500 in wages
during any calendar quarter in the current or preceding year),
you're automatically liable for the state unemployment tax. In
the remaining states, broader tests for taxability are applied.
So, if you happen to be in one of those states, you may end up
paying state unemployment taxes even though you're not obligated
to pay the federal tax.
Computing the tax. Calculating what you owe in state
unemployment taxes is simply a matter of multiplying the wages
you pay each of your employees by your tax rate. However, every
state limits the tax you must pay with respect to any one
employee by specifying a maximum wage amount to which the tax
applies. Once an employee's wages for the calendar year exceed
that maximum amount, your state tax liability with respect to
that employee ends.
State unemployment tax rates are individually assigned to
each employer each year, and every state uses an
experience-rating system of some kind to determine an employer's
applicable tax rate for the year. Although these systems vary in
how they're actually administered, they share the goal of
assigning lower tax rates to employers whose workers suffer the
least involuntary unemployment and higher rates to employers
whose workers suffer the most involuntary unemployment.
However, if you're new to the system because you've only
recently hired your first employees, you'll pay tax at a fixed
rate until you've contributed to the state's unemployment
compensation program for a specified period of time (generally
one to three years, depending on the state) and established
"experience" with your employees and unemployment.
Keeping the number of unemployment insurance
claims filed by former employees to a minimum
can produce significant payroll tax savings. For
example, in all states the most favorable
unemployment tax rates are 1 percent or less.
Let's assume that you're in a state where the
taxable wage base is the first $8,000 paid to
each employee and that you earn a favorable rate
of 0.1 percent. If the generally applicable rate
is 5.4 percent, you're essentially saving $424
($8,000 x 5.3%) with respect to each employee
who earns $8,000 or more.
So, how do you achieve and maintain a
favorable experience rating? One key is to hire
only those employees whom you really need and
who are qualified for the job. Also, you should
monitor all unemployment insurance claims made
against your account and should be prepared to contest
any claims you believe to be improper.
State tax information. Click on your state on the map
below for general information about its unemployment tax. The
information includes (1) a short description of the employment
level required to subject you to the state's tax, (2) the range
of the state's tax rates and, if available, the rate assigned to
employers not having an experience rating, (3) the maximum wage
amount to which the state's tax applies, (4) the withholding
rate on employees (Alaska only), and (5) the address and
telephone number of the agency that administers the state's tax.