Unemployment tax is a payroll tax employers pay based on their total wages and a state-set rate
Unemployment tax (also called unemployment insurance tax or FUTA/SUTA) is money employers send to the government to fund the unemployment insurance system. You do not pay it directly from your paycheck — your employer pays it on your behalf. The amount varies by state, by industry, and by the employer's history of laying off workers.
The federal portion, called FUTA (Federal Unemployment Tax Act), is 6% of the first $7,000 of each employee's annual wages. Most employers receive a credit that reduces this to 0.6%, but only if they pay their state unemployment tax on time. The state portion, called SUTA (State Unemployment Tax Act), ranges from roughly 0.5% to 5.4% depending on where the business operates and its layoff history.
The tax is calculated on gross wages — the full amount before deductions — and employers file quarterly reports showing total payroll and tax owed. The money collected funds unemployment benefits when workers lose their jobs.
Key Takeaways
- Federal unemployment tax (FUTA) is 6% of the first $7,000 per employee per year, but most employers pay only 0.6% after receiving a state credit.
- State unemployment tax (SUTA) ranges from 0.5% to 5.4% and depends on the state and the employer's record of worker layoffs.
- Employers with more layoffs pay higher rates because they draw more from the unemployment fund.
- The tax is calculated on gross wages and filed quarterly, not withheld from employee paychecks.
How the federal rate works and why most employers pay less than 6%
The federal unemployment tax rate is set at 6%, but this applies only to employers who do not receive a credit. The credit exists because states are supposed to maintain their own unemployment insurance funds. When a state's fund is solvent and the employer pays state tax on time, the federal government credits back 5.4 percentage points, leaving the employer with a net federal rate of 0.6%.
This credit is nearly universal. An employer would lose it only if the state's unemployment fund is insolvent (which is rare and usually temporary) or if the employer fails to pay state unemployment tax. In practice, most employers pay 0.6% federal plus their state rate, which together typically range from 1% to 6% of payroll.
The 6% federal rate applies only to the first $7,000 of each employee's wages in a calendar year. Once an employee has earned $7,000, no more federal unemployment tax is owed on that worker for that year. This wage base resets January 1 each year.
State unemployment tax rates and why they differ
State unemployment tax rates vary widely because each state sets its own rate based on its unemployment fund balance and its experience rating system. A state might charge 0.5% in a year when its fund is healthy, or 5.4% or higher when the fund is depleted (as happened in many states during 2020 and 2021).
The experience rating is the key reason rates differ between employers in the same state. Employers with a history of laying off workers pay a higher rate because they have drawn more money from the state fund. A new employer or one with few layoffs might pay the minimum rate (often 0.5% to 1%), while an employer with frequent separations might pay 4% or 5%. This creates an incentive for employers to retain workers and avoid layoffs.
Some states also have industry-specific rates. Construction, hospitality, and agriculture often have higher rates because those industries have seasonal or temporary workers and higher turnover. A few states charge employees a small portion of unemployment tax as well, though most place the full burden on employers.
What wages are subject to unemployment tax
Unemployment tax is calculated on gross wages — the total amount paid to an employee before any deductions for income tax, Social Security, Medicare, or benefits. This includes regular pay, overtime, bonuses, and commissions.
However, not all payments count. Certain fringe benefits (like health insurance premiums the employer pays), reimbursements, and payments for unused vacation or sick leave may be excluded depending on state law. Some states also exclude payments to workers over a certain age or in certain job categories.
The federal wage base is $7,000 per employee per year. Many states use a higher wage base — some as high as $42,000 or more. This means an employer might owe federal tax on only the first $7,000 of an employee's wages but state tax on a much larger amount. Check your state's labor department website for the specific wage base in your state.
How employers calculate and report unemployment tax
Employers calculate unemployment tax quarterly based on total wages paid in that quarter. The calculation is straightforward: multiply the total gross wages by the applicable rate. For example, if an employer in a state with a 2% SUTA rate pays $100,000 in wages in a quarter, the state tax owed is $2,000 (plus the 0.6% federal tax, which would be $600 on the first $7,000 per employee).
Employers file a quarterly unemployment tax return with their state labor department (and the federal government for FUTA). The return shows total wages paid, number of employees, and tax owed. Most states allow online filing. Payment is usually due by the end of the month following the quarter — so Q1 taxes are due by April 30, Q2 by July 31, and so on.
Employers who fail to pay on time face penalties and interest. Some states also require employers to report individual employee wages and separations (the reason the employee left) so the state can verify that workers are not collecting unemployment benefits while still employed elsewhere.
Why unemployment tax rates increase after layoffs
When an employer lays off workers, those workers often file for unemployment benefits. The state pays those benefits from its fund, and the employer's experience rating goes up. In the following year or years, that employer's unemployment tax rate increases as a penalty for drawing from the fund.
The increase is not permanent. As years pass without layoffs, the employer's rate gradually decreases back toward the minimum. An employer with a clean record for several years might return to the lowest rate in the state, even if they had high rates in previous years.
This system is designed to make employers think carefully before laying off workers. A company that frequently reduces its workforce will pay significantly more in unemployment tax than a company with stable employment. Over time, this can add up to thousands or tens of thousands of dollars in additional payroll costs.
Frequently Asked Questions
Do employees pay unemployment tax?
In most states, no — employers pay the full amount. However, a few states (including Alaska, New Jersey, and Pennsylvania) require employees to contribute a small percentage. If your state requires employee contributions, they are withheld from your paycheck, and your employer reports the amount to the state.
What happens if an employer does not pay unemployment tax?
The state labor department will send notices and assess penalties and interest. If the employer continues to ignore the debt, the state can place a lien on business assets, garnish bank accounts, or suspend the business license. Unpaid unemployment tax can also affect the owner's personal credit.
Can an employer reduce their unemployment tax rate?
Yes. The main way is to avoid layoffs and keep workers employed. Over time, a clean record lowers the experience rating and reduces the rate. Some states also offer tax credits for hiring workers from certain groups (like veterans or people with disabilities), which can offset some tax owed.
Is unemployment tax the same as income tax withholding?
No. Income tax withholding is money taken from your paycheck and sent to the IRS. Unemployment tax is paid by the employer and funds the unemployment insurance system. They are separate taxes with different purposes and rates.
What is the difference between FUTA and SUTA?
FUTA is the federal unemployment tax (0.6% for most employers on the first $7,000 of wages). SUTA is the state unemployment tax (0.5% to 5.4% depending on the state and employer). Together they fund the unemployment insurance system, with states handling day-to-day administration and benefit payments.