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What is Unemployment Insurance & Why Does It Matter to Small Businesses?

June 10, 2020 | MaxFilings

unemployment insurance

During times of economic stress, we hear media reports about the need for unemployment insurance or increasing the benefits available. But what exactly is unemployment insurance? How is it funded? How do you qualify? And do small business owners need to have it?

Let’s start with the last question first.

Are small businesses required to have unemployment insurance?

Yes, small business owners must have unemployment insurance. If you have even 1 employee, you are required by law to pay into State Unemployment Insurance (SUI) and the Federal Unemployment Insurance Act (FUTA). While certain non-profit organizations may be exempt, there are no exemptions for small businesses. None.

A brief history of unemployment benefits?

The roots of the unemployment insurance program go back to the Great Depression when one-fourth of the workforce was unemployed. The state of Wisconsin started the first program in 1932. Three years later, Congress put the federal government into the mix, and in 1937 the constitutionality of the program was upheld by the Supreme Court. Unemployment insurance has been an important part of the American economic landscape and social safety net ever since.

How is unemployment funded?

Unemployment insurance benefits are funded by payroll taxes that are calculated with each pay period. The first $7,000 an employee earns annually is taxed at a rate of 6 percent and the maximum contribution per employee per year is $420. The money goes into an employer reserve fund, which holds anywhere from 3-7 percent of gross wages. A state reserve fund backs up the employer reserve.

Even though the federal government is involved with unemployment insurance, regulation and administration are done at the state level and tax rates are also settled by the state. The employer’s payroll tax rate is determined by factors that range from the type of business you operate to the percentage of past employees who have filed for unemployment.

Businesses with high turnover are likely to have a higher unemployment tax rate, on the presumption that more claims are going to be filed against the reserve fund.

Who is eligible for unemployment benefits?

Not all former employees are eligible to collect unemployment benefits. If an employee voluntarily quits, they are ineligible for the program. If they are terminated “at will” or “for cause” they are not eligible for unemployment. The program is intended to help those, who through no fault of their own, have lost a job. It is not intended to protect those who are fired for valid reasons.

Contested unemployment claims

If a small business owner believes a claim against their reserve fund is unjustified or even fraudulent, then the employer has the option to contest the claim. The state will need to be given documentation for why the claim is being contested. Business owners have only 10 days to contest the claim or it will go through.

Do independent contractors qualify for unemployment?

Generally speaking, independent contractors and freelancer workers are not covered by unemployment insurance. There are some exceptions during the COVID-19 economic shutdown but, in general, these workers are considered business entities unto themselves. The same goes for any other self-employed individual that does not have employees on the payroll.

Read more about Business Taxes

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