Unemployment Eligibility In 2021: The Employers Guide
With unemployment during the pandemic the highest it’s been since data collection started in 1948, if you’re like many employers, your business hasn’t been immune to layoffs. In the midst of all the economic pressures you’re facing right now, dealing with the added stress of unemployment may be the last thing you want to think about. But it’s important to understand just what your responsibilities are for unemployment benefits so that your business doesn’t face further financial consequences.
At Complete Payroll Solutions, we offer a full range of HR, payroll, and compliance support to companies throughout the Northeast to help with all aspects of workforce management. And a question we’ve been hearing a lot lately from clients is what they need to do to be compliant with unemployment insurance requirements when they let a worker go.
In this article, we’ll explain how unemployment benefits work and just what your role is in providing coverage for workers. We’ll break down:
- What is unemployment insurance
- Who pays for it
- Who is eligible for benefits
- The impact of the CARES Act
- What you need to do when an employee files a claim
- Penalties for non-compliance
After reading this guide, you will understand your responsibilities 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.
For example, in Massachusetts, regular unemployment benefits can last up to 30 weeks while Florida only pays up to 12 weeks of regular state unemployment insurance. When issued, federal law extensions can affect the length of time employees can collect.
Each state will also have a maximum amount that an individual can collect. In New Hampshire, the weekly limit is $504 while in Connecticut, the amount is $649.
Do Employers Have to Pay for Unemployment Insurance?
Unemployment insurance is almost always 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 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. In the Northeast states, the wage limits are as follows:
- Connecticut: $15,000
- Maine: $12,000
- Massachusetts: $15,000
- New Hampshire: $14,000
- New York: $10,800
- Rhode Island: $24,000
- Vermont: $16,400
To calculate your employment 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. It’s important to know the pandemic, if you’ve had to lay off employees because of COVID-19, your experience rating won’t be penalized.
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 as based.
The FUTA tax rate for 2020 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, listed here, 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 is eligible for unemployment 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, a person must have earned wages of at least $2,600 for claims filed in 2020)
- 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:
Can Business Owners Collect?
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?
Part-time workers can be eligible to collect unemployment. 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.
Can Family Members Collect Unemployment?
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. However, under the CARES Act, many who would otherwise not be qualified to collect, including independent contractors, may be able to file a claim.
So, if you’re an independent contractor and you lost income or have been unable to work due to COVID-19, you can file a claim for unemployment. Your state will set the amount and length of what you can collect but under no circumstances can you receive benefits longer than a maximum of 39 weeks or until December 31, 2020.
Do I Have to Do Anything When an Employee Files an Unemployment 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’re ineligible 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.
What Happens if I Don’t Pay Unemployment Taxes?
To avoid financial consequences to your company, you’ll want to make sure you make timely unemployment insurance 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.
How Can I Stay Compliant With Unemployment Insurance Requirements?
Unemployment eligibility issues can be tricky, especially now with increased layoffs and business closures stemming from the pandemic – and resulting legislative action. Complete Payroll Solutions’ compliance experts can help keep you penalty-free by making sure you’re meeting all your requirements. Take the first step by visiting our state-by-state unemployment resources.