Understanding Your Employer's Responsibility for Unemployment Benefits - Tax Professionals Member Article By Taxes Made EZ Inc
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Understanding Your Employer's Responsibility for Unemployment Benefits

Understanding Your Employer's Responsibility for Unemployment Benefits

Unemployment taxes are part of business life. Companies should not only pay taxes; they should pay attention to the claims too. And if you're not careful when filing or responding to unemployment claims from former employees, you could face stiff penalties.

According to the month of May job report from the US Bureau of Labor Statistics, unemployment remains stable at 3.6%. While the number of unemployed Americans has dropped significantly since the pandemic, business owners should still consider hiring staff. Why? Because if a future situation requires furloughs or dismissals, the organization of personnel files and the preparation of documents are crucial.

What should you do to prepare? We tell you. Let's look at the main responsibilities of the employer when it comes to unemployment benefits.


What is Unemployment Insurance?

Unemployment insurance was created to give employees salary security between jobs. This is particularly relevant when an employee is terminated due to a situation beyond their control, such as a laid-off worker. In these situations, employees can ask for a percentage of the salary they would have received had they been employed.

It is important to note that not all workers are entitled to unemployment benefits.

Those that are not eligible include:

  • Dismissed workers

  • Independent contractors

  • People who simply choose not to work

  • Workers who leave voluntarily


How is unemployment insurance financed?

Well, maybe the big question: how is the system funded? The short answer is that unemployment insurance is funded by taxes paid by employers at the state and federal levels.

The money an unemployed worker receives from unemployment insurance is funded by the payroll taxes his company pays to the government. The federal and state governments administer unemployment insurance. Each state has its unemployment insurance program, which the federal government oversees. Since each state has its own rules for administering unemployment benefits, it is important to know what these are for each of your business locations.

The federal government generates unemployment benefits using the Federal Unemployment Tax Act (FUTA). In contrast, some states use a State Unemployment Tax Act (SUTA), a tax paid primarily by the employer (Some states require employees to pay a quota of these taxes). The amount that the employer pays is a percentage of their taxable wages.

Federal tax here is regressive and based on an employee's annual salary. Federal taxes are collected primarily to pay for administrative expenses. Each state uses its tax formula for this program. Although there is a minimum wage threshold of $7,000 per year on which payments can be based, on average, in the state, taxes are collected based on the employer's taxable wages.


What are the benefits of unemployment insurance?

Most programs allow employees to claim about half their salary for up to 26 weeks of unemployment. A worker's exact eligibility period is based on the weeks they are actively a part of an employer's taxable salary base in each calendar quarter.

Although the program's goal is to give an employee up to half their salary, the average amount received is usually just over $300 per week.


Who gets paid if employees work in multiple states?

All states use four defined factors to determine which state should receive unemployment tax money when an employee of a company works in more than one state.

  • Where does the employee live?

  • Is the employee's work localized?

  • Where is the employee's daily office located?

  • Where is the employer's registered office (residence)?


What happens when an employee applies for an unemployment claim?

An employee leaves the company, and you receive a notification from the state a few weeks later that the employee has applied for unemployment benefits. It had to happen, but what do you do?

First: Determine if the claim is valid. You can dispute the claim if you fired them for a good reason or if they left the company voluntarily. You could accept the claim if they were terminated due to a situation beyond their control, such as a layoff. If you accept the claim, you can indicate that you accept it or simply do nothing.

If you are challenging an employee's eligibility for unemployment benefits, you have a lot of work ahead of you. You will first need to respond quickly to the state unemployment service, and there is usually a selected time frame for doing so (usually 10 days).

You could receive a higher tax rate and penalties if you don't respond by the deadline. Your response is expected to include details such as the employee's salary, occupation, dates of employment, and the exact reason the employee was terminated. (Having complete records in your employment file is essential to successfully win a claim.)

But the job may not be finished yet. The former employee can still appeal the decision if the complaint is disputed and the state deems it correct. When this happens, the state unemployment office will arrange a telephone hearing between your company, the terminated employee, and their attorney.

During this hearing, you and the company's legal team will have the opportunity to explain how long the former employee has worked for your company. The burden of proof to convince the state that the former employee was terminated for cause rests on your shoulders, so make sure you have everything you need. You may have witnesses and evidence during the call, so ensure all people and documents are lined up beforehand.


How can employers reduce unemployment costs?

There's no magic for lowering unemployment insurance payments, but if you're ready to work early, you can reap the benefits of long-term savings.

  • Screen candidates before hiring them: And then recheck them. Comprehensive hiring protocols can ensure that you do indeed hire the right person for the right role. And let them feel that too. This can help avoid poor performance issues because the employee is not invested or is simply the wrong candidate.

  • Train and retrain: Training does two things: it provides the employee with the skills and knowledge they need to succeed, and it shows that the company is committed to their success. Employees will not only perform better, but they will also want to give their absolute best.

  • Review your tax rate options: Some states allow businesses to "purchase" lower unemployment insurance tax rates by modifying premium schemes.

  • Time your staffing increases: Need a new full-time team member? Can an independent contractor help you during this busy time? Personal tracking helps you keep track of your unemployment tax payments.


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