Unemployment compensation is regulated by the Federal Unemployment Tax Act (FUTA) (26 U.S.C. 3301 et seq.) and jointly administered by federal and state authorities. Under the FUTA, the individual states are free to set their own limits on weekly benefit amounts, unemployment tax rates, taxable wage bases, and unemployment eligibility and disqualification requirements. Unemployment benefits are financed by a tax on a certain portion of wages paid to employees. This taxable wage base varies from state to state.

General test. Virtually all employers must pay federal and state unemployment tax. Employers pay the federal tax if, during the current or preceding year, they:

Agricultural employers and employers of domestic workers have different tests for liability.

Domestic employers test. Employers of domestic employees must pay state and federal unemployment taxes if they pay cash wages to household workers totaling $1,000 or more in any calendar quarter of the current or preceding year (26 U.S.C. Sec. 3306). A household employee is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter.

Agricultural employers test. Employers must pay federal unemployment taxes if (1) they pay employees cash wages of $20,000 or more in any calendar quarter, or (2) in each of 20 different calendar weeks in the current or preceding calendar year, there was at least 1 day in which they had 10 or more employees performing service in agricultural labor (26 U.S.C. Sec. 3306). The 20 weeks don’t have to be consecutive weeks or the same 10 employees, nor must all employees be working at the same time of the day. Generally, agricultural employers are also subject to state unemployment taxes.

Exclusions. Under the FUTA, the states are not required to provide unemployment compensation to certain individuals, including, for example:

No federal unemployment tax is collected on the wages of people in these occupational categories nor on the wages of state or federal employees.

The amount an individual receives for a compensable week of unemployment, known as the weekly benefit amount, varies according to state law. Usually the amount is equal to 50 percent or 60 percent of the claimant's normal weekly earnings up to a maximum prescribed by state law. Benefits typically continue for up to 26 weeks. There is an initial waiting period in most states before benefits begin, typically 1 week.

"Able and available" requirement. Unemployed individuals must be able to and available for work in order to receive benefits. This "able and available" requirement applies only to the weeks of unemployment for which an individual claims benefits. State laws define "availability" in different ways, and some states have special rules for students or those performing military reserve services.

Tax sharing. Employers pay taxes to both the federal government and the state. The federal tax rate is 6.0 percent of the first $7,000 of each employee's calendar-year wages (26 U.S.C. Sec. 3301). The $7,000 is the federal wage base. Your state wage base may be different. Employers generally can claim a credit against the gross FUTA tax based on the state unemployment taxes they pay (26 U.S.C. Sec. 3302). The credit may be as much as 5.4 percent of the FUTA taxable wages. An employer is entitled to the maximum credit if it paid its state unemployment taxes in full, on time, and on all the same wages as are subject to the FUTA tax (as long as the state is not determined to be a credit reduction state).

In some states, the wages subject to state unemployment tax are the same as the wages subject to the FUTA tax. However, certain states exclude some types of wages from state unemployment tax, even though they are subject to the FUTA tax (e.g., wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits). In such circumstances, an employer may be required to deposit more than 0.6 percent FUTA tax on those wages.

Successor employer. If an employer acquires a business from an employer that was liable for the FUTA tax, the acquiring employer may be able to count the wages that the employer paid to the employees who continue to work for the successor employer when figuring the $7,000 FUTA tax wage base.

Depositing the FUTA tax. For deposit purposes, employers should figure the FUTA tax quarterly. Employers should stop depositing the FUTA tax on an employee's wages when the employee reaches $7,000 in taxable wages for the calendar year.

If an employer's FUTA tax liability for a quarter is $500 or less, the employer does not have to deposit the tax. Instead, the employer may carry it forward and add it to the liability figured in the next quarter to see if the employer must make a deposit. If the FUTA tax liability for any calendar quarter is over $500 (including any FUTA tax carried forward from an earlier quarter), the employer must deposit the tax by electronic funds transfer (EFT).

Employers must deposit the FUTA tax by the last day of the first month that follows the end of the quarter. If the due date for making the deposit falls on a Saturday, Sunday, or legal holiday, employers may make the deposit on the next business day. If an employer's liability for the fourth quarter (plus any undeposited amount from any earlier quarter) is over $500, employers should deposit the entire amount by the due date of Form 940 (January 31). If it is $500 or less, employers can make a deposit, pay the tax with a major credit card, or pay the tax with their Form 940 by January 31.

Timely payment. The FUTA tax payment should be made by the last day of the first month that follows the end of the quarter. If the due date falls on a Saturday, Sunday, or legal holiday, the payment can be made on the next business day. The federal credit for state tax contributions depends in part on prompt payment of the federal tax. Employers must file their federal tax return for the previous calendar year by January 31 or risk losing a portion of the credit. Prompt payment is also essential to avoid interest charges and other possible penalties. For more detailed instructions, see the IRS website at https://www.irs.gov/forms-pubs/about-form-940.

Experience ratings. Experience ratings are a method of determining how much each individual employer must pay to its state unemployment fund. The ratings are based on the employer's experience with unemployment, as shown by the number of former employees who have collected benefits. FUTA doesn't require the states to use experience ratings, but all of them do. Although methods vary from state to state, the objective in every state is to allow employers to qualify for a lower rate if they keep labor turnover down and keep ineligible employees from drawing benefits.

Preventing State Unemployment Tax Act (SUTA) “dumping.” The amount an employer pays for unemployment insurance is directly related to its experience rating. Under the federal SUTA Dumping Prevention Act, each state must have provisions in its own unemployment compensation laws to prevent employers from avoiding the higher compensation rates associated with their employment practices. The laws must provide for the transfer of the experience rating with the employees. State laws must include civil and criminal penalties. The Act also gives state unemployment agencies access to the federal listing of newly hired workers so that states can more easily identify individuals who are not eligible for benefits or who may have received overpayments because they are working.

Voluntary contributions. One way for an employer to reduce its tax liability for the following year is to make voluntary contributions to the state unemployment tax fund, where allowed.

Consistent auditing of charges and protesting benefit awards to ineligible ex-employees can save in state unemployment taxes and result in the maximum credit allowed under FUTA. Employers should:

Employers should handle unemployment compensation claims carefully. Employers receive written notice from the state unemployment agency when a former employee has filed a claim for benefits. In general, an employer may acknowledge the claim as valid or dispute it. Because unemployment compensation tax is closely tied to a company's claims history, an employer should immediately challenge any claim that is believed to be unjustified. Not all claims are worth contesting, of course, only those for which an employer has a strong, well-documented case. In many states, it is assumed that a claim is valid if no information to the contrary is supplied by the employer within a statutory deadline, typically 7 to 14 days of receipt of the claim notice. Once the response deadline passes, it is usually too late to object to the worker collecting benefits. For this reason, the employer may wish to consider sending an objection to the agency by certified mail.

In general, the grounds for disqualification are narrow and are interpreted in a way favorable to the separated employee whenever possible. However, workers can be legitimately denied benefits for a number of reasons, e.g., simply not earning enough in wages to qualify, following a discharge for misconduct, or for voluntarily resigning “without good cause.” Good recordkeeping is essential in successfully contesting any claim. Employers should keep track of the facts surrounding each separation and know the state unemployment law.

Hearings. An in-person hearing usually will be scheduled shortly after the filing of a written protest of the claim. The employer will receive a written notice of the date, time, and place to report. If an employer representative fails to appear at the hearing, the likelihood is that the employer will forfeit its right to contest the claim any further.

Employers should be familiar with the procedures used by their state unemployment agency in claims processing, particularly in how hearings are conducted. Many states publish detailed guidance about the overall process. Check with the agency about the availability of an employer handbook or similar information. Typically, this information also can be accessed by visiting the agency's website.

In general, careful preparation for the hearing (usually conducted by a hearing officer or referee) is essential. The top priority is to achieve mastery of the facts of the case and the ability to present your side in a concise, professional manner. Equally important is a good grasp of the rules and law that apply to your case (be sure that the law supports your view that the worker was separated under disqualifying conditions such as misconduct or voluntary separation without good cause). Bring all relevant records and witnesses to the hearing. Legal representation at the hearing may be appropriate—particularly in contentious situations when other employment-related litigation may be anticipated. The hearing officer will issue a written decision shortly after the hearing. Although this may not be cost-effective, employers that are dissatisfied with the outcome of the hearing can generally protest the hearing officer's decision to one or more appeals within the state unemployment agency itself and then through the state court system.

Termination for cause. If you are protesting a fired employee's eligibility for benefits, prepare to show misconduct on the employee's part. An employee who is fired for poor performance or judgment will usually collect benefits. However, an employee who intentionally or deliberately disregards certain standards of conduct or behavior may be denied benefits. Fighting, insubordination, stealing, committing illegal acts on company property, failing a drug test, etc., are often legitimate grounds for a misconduct-based disqualification depending on the state. In addition, if an employer has a written policy setting out standards of conduct and behavior and the employee knew about the policy, intentional violation of the policy may rise to the level of misconduct and result in denial of unemployment benefits. If there is clear documentation that the worker's conduct was completely unacceptable, that the employee knew or should have known that it was punishable by termination, and that customary disciplinary procedures were followed, you may be on solid footing to contest a claim. Furthermore, be sure that you can offer evidence establishing that the employee was not singled out for discharge but given fair treatment under your company's established policies and work rules.

Voluntary termination. Employees who resign voluntarily and without good cause are usually disqualified from receiving unemployment compensation. While “voluntariness” is seldom an issue, “cause” comes up frequently. “Good cause” (or an equivalent term such as “just cause”) is generally understood to mean a real, substantial, and compelling reason that would lead a reasonable person to quit under like circumstances. In most states, the employee must establish that they had good cause to leave the job and that the reason for leaving can be attributed, at least in part, to the employer's actions or lack of action, e.g., failure to correct sexual harassment in the workplace.

An employers' best defense to an employee's claim that they had good cause and should be granted unemployment benefits is a signed resignation letter or statement from the employee setting forth the specific reasons for separation. The best time to do this is while the employee is still on the job, preferably as soon as you learn that the employee intends to resign. A detailed resignation statement pins the employee down to the reasons stated, and it gives the employer a basis for determining whether the claim should or should not be contested. Moreover, if the employee claims to be leaving because of sexual harassment, retaliatory discipline, unsafe working conditions, or discrimination (related to race, disability, gender, national origin, religion, age, etc.), the employer can launch an immediate investigation and contact legal counsel. A resignation may be found to be tantamount to a “constructive discharge” if the conditions on the job are so unpleasant that the employee is forced to leave.

Exception—domestic violence. In most cases, good cause for quitting must be related to the job and not purely personal to the employee. The most notable exception to this is voluntary termination by an employee due to a domestic violence situation at home. An increasing number of states are now including domestic violence in the list of good-cause reasons for voluntarily terminating employment. Although state laws vary, most provide at a minimum that employees may be deemed to have left work with good cause, and thus be eligible for benefits, if they left employment to protect themselves or their children from domestic violence abuse. Many states require the employee to provide documentation of the abuse or to have tried reasonable alternatives before quitting, such as a temporary restraining order. In addition, many states do not charge employer unemployment insurance accounts for compensation provided to victims of domestic abuse.

Disaster Unemployment Assistance (DUA) is a program administered by states as agents of the federal government to provide financial assistance to individuals who have lost their jobs or their self-employment as a direct result of a major disaster declared by the president. To be eligible for assistance under this program, an individual must prove that they are not eligible for regular unemployment insurance benefits and must meet a list of eligibility qualifications.

This assistance is available the first day of the week after the date the disaster began. Eligibility continues for up to 26 weeks after the president has declared the situation to be a major disaster, as long as an individual continues to be unemployed as a result of the disaster. The amount of weekly benefits available to an individual is determined by the law of the state in which the disaster occurred. Claims must be filed according to the specific requirements of the individual's state. Contact the appropriate state unemployment insurance agency for more information. For more information about DUA, visit https://oui.doleta.gov/unemploy/disaster.asp.

Unemployment compensation is available for eligible ex-servicemembers. The program is administered by the individual states as agents for the federal government. Generally, individuals are eligible for unemployment benefits if the individuals were on active duty with a branch of the U.S. military and were separated under honorable conditions. The law of the state (under which the claim is filed) determines benefit amounts, number of weeks benefits can be paid, and other eligibility conditions. Benefit applicants should have a copy of their separation papers (DD Form-214). For more information, visit https://oui.doleta.gov/unemploy/ucx.asp.

Note: There is no payroll deduction from the servicemember's wages for unemployment insurance protection. The various branches of the military pay for the benefits.

Trade readjustment allowances (TRAs) are income support to persons who have exhausted unemployment compensation and whose jobs were affected by foreign imports.

The Federal Trade Act provides special benefits under the Trade Adjustment Assistance (TAA) program to individuals who were laid off or had hours reduced because their employer was adversely affected by increased imports from other countries.

The available benefits include paid training for a new job, financial assistance for searching for a job in other areas, or relocation to an area where there are more jobs. Qualifying individuals may be entitled to a weekly TRA after their unemployment compensation is exhausted. To file a claim, employees should contact their state unemployment agency. For more information on TRAs, visit https://oui.doleta.gov/unemploy/tra.asp.

States may voluntarily create a Self-Employment Assistance (SEA) program to help unemployed individuals create jobs for themselves by forming their own small businesses. Under an SEA program, an eligible individual receives a weekly self-employed allowance (instead of unemployment benefits) to start up their business. To be eligible for the allowance, the individual must be eligible for unemployment compensation benefits, must have been permanently laid off from their job, and must be identified as a person likely to exhaust regular unemployment benefits. An individual also must take part in self-employment activities, such as entrepreneurial training. To learn whether their state has an SEA program and/or to file a claim, employees should contact their state unemployment agency. For more information on SEA programs, visit https://oui.doleta.gov/unemploy/self.asp.

The ETA administers federal government job training and worker dislocation programs, federal grants to states for public employment service programs, and unemployment insurance benefits. These services are primarily provided through state and local workforce development systems. For more information on unemployment insurance, visit https://oui.doleta.gov.