An Employer’s Guide To Unemployment Eligibility In 2023
While unemployment has dropped since its all-time high in April 2020, if you’re like many employers, you’ll still likely have employees leave your workforce occasionally. Receiving an unemployment claim when this happens can make an employee’s departure from your organization even more stressful. When this occurs, are you clear on unemployment eligibility rules so you can make sure you’re meeting your responsibilities? Let’s make sure.
In this article, we’ll discuss how unemployment benefits work and what your role is in providing coverage for workers, including who is eligible, who pays for it, and what you need to do when an employee files a claim. After reading this, you’ll understand what your company needs to do to avoid costly penalties for noncompliance.
What is unemployment insurance?
Unemployment insurance is a combined federal and state program that provides cash benefits to eligible workers that are unemployed through no fault of their own. That means those who quit a job voluntarily are typically ineligible.
The program temporarily replaces a portion of lost wages for workers who have been laid off, are available to work, and are looking for work. Generally speaking, unemployment insurance provides up to 26 weeks of benefits and, on average, replaces about half of a worker’s previous wages, although this varies by state.
Each state will also have a maximum amount that an individual can collect. In Mississippi, the state with the lowest amount, the weekly limit is $235; conversely, in Washington, it’s $929.
Who pays for unemployment insurance?
When considering unemployment eligibility from an employer’s perspective, one of the questions that may be top of mind is “Who pays for it?” In almost all cases, unemployment insurance is funded by employer contributions through State Unemployment Tax Act (SUTA) and Federal Unemployment Tax Act (FUTA) payroll taxes that are based on a percentage of employees’ earnings. However, three states also require employee contributions to unemployment insurance, which you would withhold and pay to the state on your workers’ behalf: Alaska, New Jersey, and Pennsylvania.
State Unemployment Tax (SUTA)
State unemployment tax is calculated on a percentage (called reserve ratio experience rating, which we’ll discuss below) of each worker’s earnings up to a wage limit that varies by state. For example, the wage base limit for Massachusetts is currently $15,000, which means you’ll only pay the tax on $15,000 of an employee’s wages.
To calculate your unemployment tax, take the wages up to the base limit for each employee multiplied by your experience rating. This rating is set by the state and is based on your industry and experience with unemployment insurance over a period of time known as the lookback period.
So the fewer workers who collect unemployment during the lookback period, the lower your tax rate will be. Conversely the more claims activity, the higher your experience rating.
The taxes must then be reported and submitted to the state fund on a quarterly basis in each applicable state.
Keep in mind that unemployment is paid only to one state. Typically, unemployment is paid to the work state, not the resident state. If you have employees who work in multiple states, unemployment would be paid to the state that you as the employer is based.
Federal Unemployment Tax (FUTA)
The FUTA tax rate for 2023 is 6% on the first $7,000 of employee wages (a max of $420 per year per employee). However, companies can qualify for a tax credit of up to 5.4% based on their timely payment of state unemployment taxes. So for these businesses, the rate would be as low as .6%. Just be aware that employers in a credit reduction state can’t claim the full credit.
If your taxes are more than $500 in any quarter, you’ll need to make quarterly payments. Otherwise, you can carry over the tax until your cumulative tax is over $500. You’ll also need to report annual FUTA tax payments using IRS Form 940.
Who is eligible for unemployment?
To receive unemployment benefits, former workers need to file a claim with the unemployment insurance program in the state where they worked. Each state will have their own unemployment guidelines. For the most part, an employee meets unemployment eligibility requirements if:
They are a US citizen or legally authorized to work in the US
Have a current employment history that meets the state’s minimum work and wage requirements, such as wages earned during a “base period” (in New York, for example, in 2023, a person must earn wages of at least $3,100 in one of the calendar quarters in their base period and the total wages paid to them in their base period must be 1.5 times the high quarter wages.)
Are paid as an employee, although there are some temporary exceptions during the pandemic that we’ll discuss below for self-employed workers
Have a legitimate reason for filing a claim, meaning, they were let go because of a lack of work, downsizing or the company closing
Are physically able and available for work
These are general criteria, but many companies have unique circumstances that can raise questions about an employee’s ability to collect. Some common questions we get about eligibility include:
Am I eligible for unemployment as an employer?
Business owners that are registered as “S” corporations can qualify for unemployment benefits. That’s because a shareholder in an S corporation that works for the business is considered an employee.
You may be able to claim unemployment if you’re set up as a W-2 employee with a defined role and responsibilities like president or CEO.
Are part-time employees eligible for unemployment?
In some situations, part-time workers meet unemployment eligibility requirements. However, it really depends on how long they’ve worked and what wages they’ve earned. If they meet the state’s minimum requirements, then they are able to submit a claim; however, they won’t be entitled to the full amount. Instead, let’s say an employee makes $300 a week, they may only be able to collect a lower figure like $150 a week.
Are furloughed employees eligible for unemployment?
If you don’t have enough work for employees and you reduce their hours, they may be eligible for unemployment insurance. This varies on a state by state basis, but generally, a reduction in hours of 20 percent or more is sufficient to demonstrate that an individual is unemployed and entitled to some compensation.
Are there separate unemployment eligibility requirements for family members?
The answer to this question depends on how your business is set up and the state that you operate in. For example, in Michigan, family members can’t collect if they work for a partnership that’s comprised solely of their spouse or children or comprised solely of their parents if they’re under 18. However, a family member that works for a family corporation in the state is covered by unemployment benefits.
Are independent contractors eligible for unemployment?
Normally, independent contractors, self-employed individuals, and sole proprietors can’t collect unemployment because their compensation isn’t reportable and they don’t pay unemployment tax on themselves. That changed temporarily during the COVID-19 pandemic, during which many who would otherwise not be qualified to collect, including independent contractors, could file a claim. However, that exception ended in 2020.
What are my responsibilities as an employer when an employee files a claim?
The process for an employee to file a claim and your responsibilities vary by state. In Massachusetts, for example, when an employee is separated from work, you must notify them of their options at the time of separation.
The employee can then file a claim either online or by phone. Once they do, you’ll receive a notification. At that point, you’ll have the option to accept the claim or appeal it if you feel they don’t meet the unemployment eligibility criteria because, for example, you fired them for misconduct or for violating company policy. If you choose to contest the claim, you’ll want to have all the documentation to back up your decision for terminating the employee.
If the state approves an employee’s unemployment claim, it will impact your experience rating, which we described earlier.
How do I stay compliant and avoid issues related to unemployment eligibility?
To avoid financial consequences to your company, you’ll want to make sure you understand unemployment eligibility so you can make accurate and timely payments in full on both a federal and state level.
For example, if you don’t pay the federal unemployment insurance taxes on time, you’ll lose your FUTA tax credit. And for failing to pay your SUTA taxes, your state could assess interest and penalties. If you’re a Massachusetts employer, interest will accrue on unpaid principal at a rate of 12% per year from the quarter due date until fully paid.
One exception to paying your SUTA taxes is if you’ve registered as a reimbursable employer. While you’d still pay FUTA taxes, instead of paying SUTA, you’d be responsible for reimbursing the state for any unemployment benefits paid to former employees.
Since there are a lot of rules that make unemployment eligibility tricky for employers to tackle on their own, and missteps can lead to costly consequences, visit our state-by-state unemployment resources for more guidance on your role and obligations to remain compliant. Alternatively, if you’d prefer more hands-on assistance, consider working with an outside payroll vendor who can help alleviate some of the burden.
Editor’s Note: This blog was originally published in November 2020 and has been updated in December 2022 for accuracy and comprehensiveness.