Your employer pays unemployment insurance taxes, but you don't pay them directly
Unemployment insurance is funded by taxes your employer pays to the state, not by deductions from your paycheck. When you lose your job through no fault of your own, the state uses that pool of employer taxes to send you weekly payments. You will not see a bill for unemployment insurance, and your employer cannot deduct the cost from your wages.
The amount your employer pays varies by state and by their industry. States set their own tax rates, and employers in industries with higher layoff rates (like construction or seasonal work) typically pay more than those in stable industries. Some states also charge employers a small amount per employee, while others base the tax only on payroll.
The key point: unemployment insurance is an employer expense, not something you fund through payroll deductions the way you do with Social Security or Medicare.
Key Takeaways
- Your employer pays state unemployment insurance taxes; these costs do not come out of your paycheck.
- Each state sets its own tax rate, so the amount an employer pays depends on where the business operates and what industry it is in.
- When you lose your job, the state pays you from the pool of employer taxes collected, not from a personal account in your name.
- Unemployment payments are taxable income, so you may owe federal income tax on what you receive.
How employer unemployment taxes work
Employers in every state except South Dakota, North Carolina, and New Jersey pay unemployment insurance taxes to their state. (Those three states deduct a small amount from employee paychecks instead, but the employer still pays the bulk of the tax.) The employer sends the money to the state's unemployment insurance fund, which then pays out benefits to workers who lose their jobs.
The tax rate an employer pays is called the experience rating or merit rating. This means employers who lay off fewer workers pay a lower rate, while those with higher turnover pay more. A new business typically pays a standard rate until it has been operating for a few years and the state can measure its layoff history. This system is designed to encourage employers to keep workers on staff rather than laying them off frequently.
The taxable wage base—the amount of each employee's salary that is subject to unemployment tax—also varies by state. In most states, it ranges from $7,000 to $42,000 per year per employee. Once an employee's earnings exceed that amount in a calendar year, the employer stops paying unemployment tax on their wages for the rest of that year.
What happens when you file for unemployment
When you lose your job, you file a claim with your state's unemployment office. The state then contacts your employer to verify that you worked there and asks why you left or were let go. Your employer may contest the claim if they believe you quit without good reason or were fired for misconduct, but they do not pay anything extra if your claim is approved.
The state pays you from the general unemployment insurance fund, which is built from all the employer taxes collected in your state. You are not drawing from an account your specific employer created for you. This is why your employer's tax rate can go up if they have many claims—the state tracks how much money flows out of the fund because of that employer's former workers.
If you receive unemployment payments, those payments are considered taxable income for federal purposes. You will receive a Form 1099-G at tax time showing how much you received. Some states also tax unemployment benefits, though many do not. You can choose to have taxes withheld from your unemployment check when you file, or you can pay the tax when you file your return.
Why your employer cannot refuse to pay unemployment taxes
Unemployment insurance is a mandatory program in every state. Your employer cannot opt out, and they cannot pass the cost to you through your paycheck. Federal law sets the framework, and each state administers its own program with its own rules and tax rates.
Some employers try to misclassify workers as independent contractors to avoid paying unemployment taxes on them. If you are classified as a contractor but work under an employer's control and direction, you may still be may have access to to unemployment benefits. The state will make that information if you file a claim and the employer contests it.
Differences between states
Tax rates, wage bases, and maximum weekly benefit amounts all differ by state. A few examples: California's unemployment tax rate ranges from 1.5% to 6.2% of payroll, while Wyoming's ranges from 0.6% to 2.7%. The maximum weekly benefit in Massachusetts is $1,316, while in Mississippi it is $235. These differences mean that two workers in the same industry earning the same salary might receive very different weekly payments depending on which state they work in.
Some states have solvency funds or require employers to make additional payments during economic downturns to keep the unemployment insurance fund healthy. During the COVID-19 pandemic, many states depleted their funds and had to borrow from the federal government. Those states then raised employer tax rates to repay the loans.
If you work in multiple states or move during your claim, you may need to file in the state where you worked most recently or where you earned the most wages. The state unemployment office can tell you which state handles your claim.
What you pay in taxes on unemployment benefits
Unemployment benefits are subject to federal income tax. You do not pay Social Security or Medicare taxes on unemployment payments. When you file your tax return, you must report the total amount shown on your Form 1099-G as income.
Some people owe no federal income tax because their total income (including unemployment) falls below the standard deduction. Others may owe tax. You can reduce the amount you owe by requesting that the state withhold 10% of your weekly payment for federal taxes. This is optional, but many people choose it to avoid a large tax bill at tax time.
State income tax on unemployment varies. Some states do not tax unemployment benefits at all. Others tax them like regular income. A few states tax only a portion of benefits. Check your state's rules or ask the unemployment office when you file your claim.
Frequently Asked Questions
Can my employer make me pay back unemployment benefits if I get rehired?
No. Once the state approves your claim and sends you payments, that money is yours. Your employer cannot require you to repay it as a condition of rehiring you. If the state later determines you were not may have access to to the benefits (for example, if you quit rather than being laid off), you may be asked to repay the state, but not your employer.
Do gig workers and contractors pay into unemployment insurance?
Most gig workers and independent contractors do not pay unemployment insurance taxes and are not covered by unemployment programs. However, some states have created special programs for self-employed people and gig workers. Check your state's unemployment office website to see if you are covered. If you were misclassified as a contractor when you should have been an employee, you may still be may have access to to file a claim.
What if my employer goes out of business before I file for unemployment?
You can still file for unemployment. The state pays from the general fund, not from your employer's account. If your employer owes back taxes to the state, that is a separate matter between the employer and the state. Your benefits are not affected by your employer's tax debt.
Does my employer know if I file for unemployment?
Yes. The state contacts your employer to verify your employment and ask about the reason you left. Your employer will know you filed a claim. However, they cannot retaliate against you for filing, and if you are rehired later, they cannot use the claim against you.
Will receiving unemployment benefits affect my future job prospects?
No. Unemployment benefits are a public program, and receiving them is not a mark against you. Employers do not have access to information about who has filed for unemployment. You are not required to tell a new employer that you received benefits, though you may need to explain a gap in employment during an interview.