The Federal Unemployment Tax Rate Is 6 Percent of Wages
The federal unemployment tax rate is 6.0 percent of an employee's wages, up to a wage base limit. That limit changes each year — in 2024 it is $7,000 per employee per year. This means the maximum federal unemployment tax a single employer pays per employee is $420 annually ($7,000 × 0.06).
This is a tax on employers, not employees. Workers do not see it deducted from their paychecks. The employer sends the money to the federal government, which funds the Unemployment Insurance (UI) program that pays benefits to workers who lose their jobs.
Most employers can claim a credit against this federal tax if they pay state unemployment taxes on time. In practice, this means many employers end up paying closer to 0.6 percent federal tax after the credit, with the bulk of their unemployment tax going to their state instead. The actual amount varies by state and by the employer's history of laying off workers.
Key Takeaways
- The federal unemployment tax rate is 6.0 percent of the first $7,000 in annual wages per employee, capping at $420 per worker per year.
- Employers pay this tax; it does not come out of employee paychecks or reduce wages.
- Most employers receive a credit that reduces their federal rate to 0.6 percent if they pay state unemployment taxes on time.
- The wage base limit ($7,000 in 2024) increases most years to keep pace with wage growth.
- States set their own unemployment tax rates and wage bases, which are often higher than the federal minimums.
How the Federal Credit Reduces What Most Employers Pay
The federal government allows employers a credit of up to 5.4 percent against the 6.0 percent federal rate if they pay their state unemployment taxes in full and on time. This credit is the reason most employers pay only 0.6 percent in federal unemployment tax instead of the full 6.0 percent.
The credit is automatic — employers do not have to request it. However, the credit can be reduced or eliminated if an employer is delinquent on state taxes or if their state has borrowed money from the federal government to pay benefits during an economic downturn. When a state borrows from the federal fund, the credit for employers in that state shrinks until the state repays the loan.
New employers and those with no unemployment tax history may not receive the full credit in their first year. The credit structure encourages employers to pay state taxes promptly and to avoid laying off workers, since states charge higher rates to employers with high turnover.
State Unemployment Tax Rates Are Often Higher
While the federal rate is fixed at 6.0 percent (or 0.6 percent after credit), state rates vary widely and can be much higher. States set their own rates based on their unemployment fund balance and the layoff history of individual employers.
A new employer in most states pays a standard rate, often between 2.0 and 3.5 percent. An employer with a long history of stable employment may pay as little as 0.5 percent. An employer with frequent layoffs may pay 5.0 percent or higher. Some states also have a higher wage base than the federal $7,000, meaning employers pay tax on more of each worker's annual earnings.
The combined federal and state rate is what employers actually pay. In states with high unemployment or depleted trust funds, the total can exceed 8 or 9 percent of the first $7,000 to $15,000 in wages per employee, depending on the state and the employer's record.
The Wage Base Limit and Annual Changes
The federal wage base — the amount of each employee's annual wages subject to unemployment tax — is $7,000 in 2024. This limit is set by federal law and does not change every year. It has remained at $7,000 since 1983, even though wages have risen significantly.
Because the federal wage base is fixed, the maximum federal unemployment tax per employee has not increased since 1983. States, however, often adjust their wage bases annually or periodically. Some states use the same $7,000 base; others use $8,000, $10,000, $15,000, or higher. A few states have no wage base limit and tax all wages.
When you see unemployment tax rates quoted, always check whether they apply to the full wage base or only to the first $7,000. A state with a $15,000 wage base and a 3 percent rate will collect more total tax per employee than a state with a $7,000 base and the same 3 percent rate.
Who Pays Unemployment Tax and Who Does Not
Most employers with employees must pay federal unemployment tax. However, certain employers are exempt. Agricultural employers who pay less than $20,000 in wages in a calendar quarter, or who employ fewer than 10 workers, are exempt from federal unemployment tax. Household employers (those who hire domestic workers) are exempt if they pay less than $1,000 in wages in a calendar quarter.
Some employers, such as certain nonprofits and government agencies, may be exempt from federal unemployment tax but still required to pay state unemployment tax. Self-employed individuals do not pay unemployment tax on their own income, though they may be required to pay it if they hire employees.
State rules differ from federal rules. An employer exempt from federal tax may still owe state unemployment tax, and vice versa. Employers should check with their state's labor department to confirm their obligations.
How Unemployment Tax Funds Benefits
Unemployment tax revenue goes into trust funds — one federal and one in each state — that pay benefits to workers who lose their jobs. The federal portion funds the Extended Unemployment Compensation program, which provides additional weeks of benefits during recessions, and the federal-state Extended Benefits program.
State funds pay regular unemployment benefits. When a state's fund runs low during a recession, the state may borrow from the federal government. The state then repays the loan with interest, and employers in that state may face higher tax rates until the loan is repaid.
The amount of tax collected does not directly determine the amount of benefits a worker receives. Benefits are based on prior wages and the worker's reason for job loss. However, the total tax collected must be sufficient to cover benefits during both good economic times and downturns, so rates and wage bases are adjusted to maintain adequate reserves.
Frequently Asked Questions
Why is the federal wage base still $7,000 when wages have grown so much?
Congress has not raised the federal wage base since 1983, even though average wages have more than tripled. This means the federal unemployment tax now covers a smaller percentage of total wages than it did 40 years ago. States have raised their wage bases periodically, which is why state unemployment tax often applies to more of an employee's earnings than federal tax does.
Can an employer's unemployment tax rate go down if they do not lay off workers?
Yes. Most states use an experience-rating system that lowers an employer's rate if they have few layoffs and a stable workforce. A new employer starts at a standard rate, but after three to five years of low turnover, the rate can drop significantly. Conversely, employers with high layoff rates pay higher rates.
Do employees pay any part of unemployment tax?
No. Federal unemployment tax is paid entirely by employers. A few states require employees to contribute to their state unemployment fund, but this is separate from federal unemployment tax. Employees should check their state's rules to see whether they pay into state unemployment insurance.
What happens if an employer does not pay unemployment tax?
The employer faces penalties, interest, and potential legal action from the state and federal government. Unpaid unemployment taxes can result in wage garnishment, liens on business assets, and criminal charges in cases of willful evasion. Employers should report and pay on time to avoid these consequences.
Is the 6 percent rate the same in every state?
The federal rate is 6.0 percent everywhere, but most employers pay only 0.6 percent federal tax after the credit. State rates vary widely — from under 1 percent to over 5 percent depending on the state and the employer's layoff history. The combined federal and state rate is what matters for payroll planning.