Unemployment tax is a payroll tax that employers and sometimes employees pay to fund state unemployment insurance programs

Unemployment tax is money withheld from paychecks or paid directly by employers to state governments. That money goes into a fund that pays unemployment insurance benefits — the weekly payments workers receive when they lose a job through no fault of their own. The tax is not optional; it is required by federal law, and every state runs its own unemployment insurance system with its own tax rates and rules.

You may see unemployment tax listed on your pay stub as "SUI" (State Unemployment Insurance) or "UI." In most states, only the employer pays this tax. In a few states — New Jersey, New York, Pennsylvania, and Alaska — employees also contribute a small percentage of their wages. The amount varies by state and by industry, but it typically ranges from 0.5% to 5.4% of an employee's gross wages, up to a state-set maximum.

Key Takeaways

  • Unemployment tax funds the weekly payments workers receive when they lose a job involuntarily, and employers pay most or all of it in most states.
  • Each state sets its own tax rate, wage base (the maximum salary subject to tax), and rules about who must pay, so the amount varies widely by location and industry.
  • New employers typically pay a standard rate, but established employers pay a rate based on how many former employees have drawn benefits — companies with fewer claims pay less.
  • The federal government also collects a small unemployment tax (FUTA) to fund job training and extended benefits during recessions.

How employers' unemployment tax rates are set

Most states use an experience rating system to set each employer's tax rate. This means the rate depends on the employer's history of layoffs and job separations. An employer whose workers rarely draw unemployment benefits pays a lower rate. An employer with high turnover or frequent layoffs pays a higher rate. This creates an incentive for employers to keep workers on the job and to contest unemployment claims they believe are invalid.

New employers do not have a history yet, so they pay a standard rate set by the state — usually somewhere in the middle of the range. After a few years of payroll history, the state calculates an experience rating based on the actual claims filed by former employees. The rating is recalculated annually, usually in the fall or early winter.

The state also sets a wage base — the maximum amount of each employee's annual wages that is subject to unemployment tax. In 2024, this ranged from about $7,000 in some states to over $50,000 in others. Once an employee's wages reach that cap in a calendar year, the employer stops paying unemployment tax on additional earnings for that worker.

Federal unemployment tax (FUTA) is separate from state tax

In addition to state unemployment tax, employers pay a federal unemployment tax called FUTA (Federal Unemployment Tax Act). This is a flat 6% tax on the first $7,000 of each employee's annual wages. However, employers receive a credit of up to 5.4% if they pay their state unemployment tax on time and in full, which means the effective federal rate is usually 0.6%.

FUTA money funds two things: the federal portion of extended unemployment benefits during recessions, and grants to states for job training and reemployment services. Unlike state unemployment insurance, which is tied to individual claims, FUTA is a general fund that supports the system as a whole.

Who does and does not pay unemployment tax

Most private employers pay unemployment tax on all employees. However, some categories of workers are exempt. Self-employed people do not pay unemployment tax on themselves, though they may pay self-employment tax for Social Security and Medicare. Certain nonprofit organizations, religious institutions, and government agencies may be exempt or may have different rules.

Family members employed by a family business may be exempt in some states. Agricultural workers, domestic workers, and workers earning below a certain threshold (which varies by state) may also be exempt. The state unemployment insurance office can tell you whether a specific type of work is covered in your state.

How unemployment tax connects to your benefits

If you lose your job, you do not apply for unemployment tax — you apply for unemployment insurance benefits, which is what the tax funds. The amount you receive and how long you can receive it depend on your state's rules and your work history, not on how much unemployment tax was paid on your behalf.

Most states require that you worked for a covered employer for a minimum period (often 12 months) and earned a minimum amount of wages before you can draw benefits. Some states also have a one-week waiting period before benefits begin. The weekly benefit amount is usually calculated as a percentage of your average wages over a recent period, with a state-set maximum.

What happens if an employer does not pay unemployment tax

Employers who fail to pay unemployment tax face penalties, interest, and potential legal action by the state. If an employer goes out of business or cannot pay, workers may still receive benefits from a state fund, though the process can be slower. The state may also pursue the employer for repayment.

If you believe your employer has not been paying unemployment tax on your wages, you can report it to your state's labor department or unemployment insurance office. They can investigate and take action. This does not affect your own tax return or your ability to draw benefits if you lose your job.

Frequently Asked Questions

Can I see how much unemployment tax my employer paid on my behalf?

No — unemployment tax is an employer obligation, and the amount is not itemized on your pay stub. You can see it listed as a deduction in some cases, but the actual tax rate and amount paid is between your employer and the state. Your state's unemployment insurance office can tell you the current rate for your employer's industry and size.

Do I pay unemployment tax if I am self-employed?

No. Self-employed people do not pay unemployment tax and are not covered by unemployment insurance. If you lose work, you cannot draw unemployment benefits. However, you may be able to draw benefits if you were previously employed by someone else and meet your state's requirements.

Does unemployment tax go up if I file a claim?

Not directly for you, but it may go up for your employer. If you draw unemployment benefits, that claim is charged to your employer's account and may increase their experience rating in future years. This is why some employers contest claims — they are trying to keep their tax rate from rising.

What is the difference between unemployment tax and unemployment insurance?

Unemployment tax is the money paid into the system. Unemployment insurance is the benefit you receive if you lose your job. The tax funds the insurance. You do not "pay for" your own benefits — the tax is a general fund that covers all workers who meet the requirements.

Are unemployment benefits taxable income?

Yes. Unemployment benefits are considered taxable income by the federal government and by most states. You may owe income tax on benefits you receive. Some states allow you to have taxes withheld from your weekly benefit payment, or you can pay estimated taxes quarterly.