Small Business Basics: Unemployment Insurance

Small Business Basics: Unemployment Insurance


People who read the business section of the daily newspaper are familiar with the weekly jobless claims statistics. These statistics are compiled at the state level and used to determine current rates of unemployment. The data also relates to the number of people collecting unemployment insurance benefits at any given time.

It pays for small business owners to understand the basics of how unemployment insurance works. Nearly every business has to let workers go at some point, and that’s when unemployment insurance becomes a big deal. Unemployment insurance protects people who lose their jobs through no fault of their own.

  • Federal and State Unemployment

The first thing to note is that there are both federal and state unemployment insurance programs. While there are a limited number of exceptions, federal and state programs normally work together to provide unemployment benefits to workers who lose their jobs. As a result, most employers pay into both federal and state systems. Employees contribute their share via withholding.

Employees who lose their jobs are eligible for unemployment insurance benefits just so long as they were not fired for things like insubordination or breaking the law. To be eligible for benefits, former employees must have lost their jobs through no fault of their own. This means company layoffs, complete shutdown, etc.

  • How Benefits Are Funded

Dallas-based BenefitMall explains that unemployment insurance benefits are similar to Social Security and Medicare in the sense that they are funded through payroll tax deductions. Every employee who does not qualify as being self-employed by virtue of working as an independent contractor contributes to federal and state unemployment programs through payroll withholding. Such withholding shows up on pay stubs and tax forms as FUTA (federal) and SUTA (state) taxes.

Like Social Security and Medicare, employers pay their share of unemployment insurance taxes alongside their employees. Interestingly enough, tax rates are determined at the state level even though individual states work with the federal program to provide benefits.

Business owners do not have to pay unemployment insurance tax if they have no employees on the payroll. This can get tricky depending on how a business is organized. For example, a small business organized as a corporation technically employs its directors. But depending on how those directors are employed, unemployment insurance taxes may or may not be paid.

  • Unemployment Insurance and the Self-Employed

Companies that hire independent contractors to perform certain duties do not pay unemployment insurance taxes on those individuals. Likewise, the independent contractors do not pay FUTA or SUTA either. This is good in the sense that they take home more pay at the end of the work week, but it is bad in the sense that self-employed individuals cannot claim unemployment benefits should they stop working.

Unemployment insurance is a system that requires workers to pay into in order to receive benefits. Since self-employed people do not pay into the system, they are not eligible to collect unemployment. This is an important consideration for any worker thinking about leaving traditional employment in favor of self-employment.

  • Maintaining Legal Compliance

The last thing for small business owners to understand is the need to maintain legal compliance. Withholding and payment of unemployment insurance taxes is not optional. Just like FICA, employers are responsible for submitting both their own share and that of their employees to cover unemployment insurance. If those payments are not made accurately and in a timely manner, penalties await.

A company struggling to maintain compliance would do well to look into contracting with a payroll service like BenefitMall. Outsourcing payroll alleviates most of the hassles of payroll processing, withholding, and tax payments.

Categories: Finance

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