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March 29, 2010
Understanding Federal and State Unemployment Taxes

In a 2010 BLR webinar entitled "Unemployment Taxes and Claims: How to Reduce Your Costs and Effectively Contest Claims," Ronald Adler, president and CEO of Laurdan Associates, Inc., outlined the basics of how U.S. federal and state unemployment taxes work.

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Employers must pay federal unemployment taxes under the Federal Unemployment Tax Act (FUTA) if they employed at least one person who worked at least 20 calendar weeks (not necessarily consecutive) during the current or preceding tax year, or if they paid at least $1,500 in employee wages during any given quarter. Employers who meet either of these conditions must pay FUTA taxes for the entire current year.

For example, Adler said, if an employer didn’t meet either condition until October 2009, that employer would still be liable for FUTA taxes for the entire 2009 calendar year.

The current federal unemployment tax rate is 6.2 percent, due on the first $7,000 earned by each employee during a calendar year. After each worker’s wages exceed that amount during the year, the employer does not owe additional FUTA taxes for that employee for the rest of the year.

Employers who pay their federal unemployment taxes and state unemployment taxes as required can claim a 5.4 percent credit on their federal unemployment return—making the effective tax rate 0.8 percent.

"On the state level," said Adler, "the unemployment tax rules are truly a hodgepodge of requirements." Every state enforces its own unique system that typically bases an employer’s unemployment tax rate on the amount of benefits paid in the past to that employer’s former employees. Also, the tax bases, payment procedures, and other details vary widely from state to state.

Ronald Adler is president and CEO of Laurdan Associates, Inc., a human resources management consulting firm specializing in unemployment insurance audits, consulting, research and expert witness testimony. Contact him at

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