Unemployment Insurance Taxes

Following federal and state rules will keep your business in compliance
By Charles Dervarics, Writer/Editor Add this tax to your list of unexpected business costs. But though most small firms with employees must pay both state and federal unemployment insurance tax, there are simple ways to reduce your burden. To master the details of unemployment insurance, you'll need a three-part strategy:

1. Determine whether these taxes apply to your business.
2. Complete pertinent state and federal paperwork regularly and on time.
3. Learn how a federal/state partnership can help reduce your tax bite.

 

Know the unemployment tax rules and regulations

Generally, employers must pay state and federal unemployment taxes if they have at least one employee working 20 hours a week and pay quarterly wages of at least $1,500.
Try: Determine if the laws apply to you at the U.S. Department of Labor.

Register your business

New businesses must register with their state to set up an unemployment insurance employer account for future processing.
Try: Locate the right unemployment insurance agency for your region.

Pay taxes, and fill out the forms

The Internal Revenue Service collects the Federal Unemployment Tax Act (FUTA), which is a 6.2 percent tax of the first $7,000 of an employee's wages.
Try: Go to the Internal Revenue Service Web site for Form 940, Employer's Annual Unemployment Tax Return.

Don't forget the state

Here's some good news: Businesses can avoid most of their FUTA tax if they can prove payment of state unemployment insurance tax. Prompt payment to the state can reduce the federal tax burden by as much as 90 percent.
Try: Check out the U.S. Tax Code for the advantages of tax credits.

Remember: No one-size-fits all

While the federal government sets basic guidelines, each state administers its own unemployment insurance program. As a result, states may have different rules on eligibility, benefits and tax rates.
Try: The Department of Labor provides state-specific unemployment insurance rules.

• If a business offers a severance package to a departing employee, it may affect that individual's unemployment insurance claim, according to Business & Legal Reports.
• With the credit for state taxes paid, the federal FUTA tax can be as little as $56 per employee per year.
• In some states, wages subject to unemployment insurance tax include tips as well as meals and lodging provided by an employer.
• The Department of Labor also updates new state rules and regulations during the year.
• In many states, businesses must file quarterly wage forms to meet state unemployment insurance requirements. Many states also send tax packets to registered employers as a reminder in this process.