Risk

Unemployment Tax Rate: Key Insights for Businesses

Alison Duronslet

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Part of doing business is ensuring your employees have access to a safety net should they find themselves unemployed through no fault of their own. That safety net may be comprised of various benefits available to separated employees, but the primary one is unemployment insurance (UI). The purpose of unemployment insurance is to provide separated employees with temporary financial assistance until they can secure a new job.

Who pays unemployment tax?

Unemployment benefits are funded by employers through payroll taxes in all states but three: Alaska, New Jersey, Pennsylvania, where employees are also required to make a small contribution. Unemployment payroll taxes vary based on the state your employees work in, and previous benefit charges applied to your account. You are notified of your rate via an annual state unemployment insurance (SUI) tax rate notice.

What do I do with my annual tax rate notice?

You should review each tax rate notice for accuracy as it will include critical information that can impact your payroll expenses.

Key information to review

• Taxable payroll: The total wages subject to state unemployment tax
• UI contributions paid: The amount of unemployment tax paid in the previous year
• UI benefit charges: Claims that have affected your tax rate
• Reserve balance: The difference between your contributions and claims
• Taxable wage base: The maximum wages subject to SUI tax per employee
• Your assigned SUI tax rate: Did it increase, decrease, or stay the same?

If you are handling this in-house, consider an unemployment tax help solution to assist with managing this expense.

How is my tax rate computed?

States vary in terms of how they calculate an employer's SUI tax rate and have different SUI tax rate ranges. When reviewing your SUI tax rate notice, do you understand the factors that contribute to how your SUI tax rate is computed? Generally, most states base unemployment tax rates on an experience rating, which considers:

• The number of unemployment claims filed against your account
• The length of time you've been in business
• Your industry classification

Understanding how unemployment compensation directly impacts your UI tax rate is important if you want to better manage your SUI tax rate going forward.

How long will I be paying unemployment tax?

There is a limit, called the taxable wage base, on how much UI tax you must pay per employee per year. The wage base refers to the maximum amount of an employee's earnings subject to SUI taxes within a given tax year. The wage base varies by state and can change on an annual basis. Are you familiar with how to calculate state unemployment tax?

For example, if you were a new business in California in 2025:

• Taxable wage base: $7,000
• New employer SUI tax rate: 3.4%
• Maximum tax due per employee: $238 annually ($7,000 × 3.4%)

However, if you were a new business in Washington state in 2025 with the same tax rate:

• Taxable wage base: $72,800
• New employer SUI tax rate: 3.4% (varies by industry up to 5.4%)
• Maximum tax due per employee: $2,475.20 annually ($72,800 × 3.4%)

The amount of tax paid depends on actual wages paid to each employee, however, knowing how to calculate state unemployment tax ensures you're budgeting correctly and managing payroll effectively.

What can I do if I don't agree with my SUI tax rate?

If you disagree with the SUI tax rate your company has been assigned, you can file a protest or appeal to the unemployment insurance agency requesting reconsideration. Keep in mind there are strict deadlines that must be followed, and the response time is provided on the SUI tax rate notice itself. You'll want to include your business name and state account number as well as the reason for your protest or appeal in addition to other facts the state may require. Some states also allow employers to make voluntary contributions to effectively buy down their SUI tax rate. If you are unsure which option is best for your company, engaging unemployment tax services might be helpful.

Understanding SUTA and FUTA: Key differences and their impact

In addition to SUI taxes (also known as State Unemployment Tax Act (SUTA)), employers also pay FUTA. What is FUTA? FUTA stands for the Federal Unemployment Tax Act and FUTA taxes are also related to unemployment insurance. Federal payroll taxes are collected to finance unemployment benefits at the federal level, fund administration of unemployment and job service programs at the state level as well as to provide loans to insolvent states to cover benefits paid, if necessary. The FUTA tax rate is 6.0% on the first $7,000 of each employee's wages. However, employers who pay their state unemployment taxes timely can receive a credit of up to 5.4% reducing the rate to as low as 0.6%.

Final thoughts: Managing your unemployment tax obligations

Whether you do business in one state or several states, managing the time-sensitive tasks necessary to control SUI tax costs can be cumbersome. Most states issue SUI tax rate notices from October through December for the following year, but keep your eyes open for a handful of states that mail them closer to mid-year such as Hawaii, New Hampshire, New Jersey, Tennessee and Vermont. Prompt review of these notices is key to ensure you meet any deadlines for protest or voluntary contributions.

A comprehensive unemployment program that includes unemployment claims management, outplacement services, and tax rate analysis provides the synergistic impact of claims processing, faster reemployment of displaced associates, and review of SUI tax management. Those elements combined can help your organization decrease the potential for SUI tax rate increases.

Reduce organizational risk with unemployment claims management. Get the guidebook.