Employers Subject to Tax

The federal tax applies to firms that have one or more employees in each of twenty weeks during a calendar year, or firms that pay $1,500 or more in wages during any calendar quarter. As of January 1987, coverage was extended to agricultural employers that have ten or more employees in each of twenty weeks during the year or that pay $20,000 or more in wages during any calendar quarter. New provisions to include domestic and municipal employees, as well as employees of nonprofit organizations, have also been added.

Amount and Duration

The amount of the weekly benefit payment a worker may receive through unemployment compensation varies according to the benefit formulaCalculation used to determine the amount of the weekly benefit payment a worker may receive through unemployment compensation. in the law of each state. Usually, the amount is about one-half of the worker’s full-time weekly pay within specified limits. The maximum is low and is easily accessible on the Web site of your state unemployment compensation agency (usually a division of the employment commission). Some states provide an additional allowance for certain dependents of the unemployed worker. With the passage of the 1986 Tax Reform Act, all unemployment benefits became fully taxable to the recipient for federal income tax purposes.

Most state laws have a waiting period—typically one week—between the time an unemployed worker files a claim for benefits and the time benefit payments begin. This is designed to place the burden of short-term temporary unemployment on the worker as well as to decrease the cost of the plan, thereby making possible greater coverage of more significant unemployment losses.

In most states, the maximum number of weeks that benefits can be paid is twenty-six. A federal-state program of extended benefits may continue payments for another thirteen weeks during periods of high unemployment, such as occurred in the early 1990s. In an economic emergency, federal funding may continue payments for another twenty-six weeks.

Qualifications for Benefits

To qualify for benefits, unemployed workers must fulfill certain conditions. They must first be involuntarily unemployed. Once they are involuntarily unemployed, they are required to register for work at a public employment office and file a claim for benefits. They must have been employed in a job covered by the state unemployment compensation law.An unemployed federal civilian or ex-serviceperson may be entitled to benefits under the conditions of a state law for determining benefit eligibility. The amount he or she may receive will be the same as if federal pay had been covered under the state law. Costs of the benefits are paid by the federal government. They must have earned a specified amount of pay or worked for a specified length of time, or both. They must be able to work (this is important in order to differentiate unemployment benefits from disability benefits), available for work, and willing to take a suitable job if it is offered to them. In most states, an unemployed worker who is sick and therefore unable to work is not entitled to unemployment compensation benefits. Some states permit payments to disabled workers under a separate disability program.Several states have compulsory temporary disability insurance laws to provide income benefits for disabled workers who are not receiving unemployment benefits. Some of these plans pay partial benefits to workers receiving workers’ compensation benefits. Others exclude these workers.

Disqualifications

Unemployed workers may be disqualified from benefits even if they meet the qualifications described above. As noted above, most state laws disqualify those who quit voluntarily without good cause or who were discharged for just cause. Those who refuse to apply for or accept suitable work, or are unemployed because of a work stoppage caused by a labor dispute, may be disqualified. Other causes for disqualification are receiving pay from a former employer, receiving workers’ compensation benefits, receiving Social Security benefits, or being deemed an independent contractor and therefore not an employee.

The effect of disqualification varies from state to state. In some cases, it means that the unemployed worker receives no benefits until he or she has again qualified by being employed for a specified length of time in covered work. In other cases, disqualification results in an increase in the waiting period. Some state laws not only increase the waiting period but also decrease the benefits.

Noncontributory

Most unemployment compensation insurance is noncontributory: employers pay all the cost in most states.Employees contribute in Alabama, Alaska, and New Jersey. The Federal Unemployment Tax Act (FUTA)Law that places a tax on employers at the rate of 6.2 percent of workers’ pay in covered jobs, excluding anything over $7,000 paid to a worker in a year for the purpose of financing unemployment compensation. places a tax on employers at the rate of 6.2 percent of workers’ pay in covered jobs, excluding anything over $7,000 paid to a worker in a year for the purpose of financing unemployment compensation. Up to 5.4 percent can be offset by employers who pay a state tax or have been excused through experience rating. So, in effect, the federal tax may be only (6.2 − 5.4 =) 0.8 percent. Revenue from this tax is deposited in the Federal Unemployment Trust Fund and credited to the state for the payment of benefits under its plan. Each state has its own trust fund. The remaining part of the federal tax goes into general federal revenues. Congress appropriates money for grants to the states for their administration of the program. If appropriations for this purpose are less than the federal share of the payroll tax, then the remainder of such revenue is put into a reserve fund for aid to the states in payment of benefits when state reserves are low.

Experience Rating

All states have experience rating; that is, they reduce the contribution of employers whose workers have little unemployment. The theory of this rating system is that it encourages employers to reduce unemployment and stabilize employment to the extent that they can. One other effect, however, is to make employers interested in disqualifying workers who apply for benefits because the benefits paid out of their account reflect their experience under the plan.This does not necessarily mean that employers try to cheat employees out of benefits. There are many borderline cases in which there is room for argument about whether or not the unemployed worker is really involuntarily unemployed. Experience rating emphasizes the fact that employers pay the cost of benefits and motivates them to be interested in disqualifications. As in other human relations situations, one can find examples of bad behavior by both employers and employees. This has led to considerable discussion of disqualification standards and administration and to many hearings and disputes.