Business Taxes: Unemployment Insurance

As a business owner that has employees, you have many different considerations to keep in mind like forms, employment tax withholdings, due dates and other IRS business tax requirements. In our Business Taxes blog post series, we’ve been trying to simplify things for business owners like you and break down all of the necessary steps and requirements you need to be aware of when it comes to having employees.

As we’ve mentioned before, the business taxes you’re required to pay to the IRS as a result of having employees are known as payroll taxes or employment taxes. Depending on which type of employees you have, there are different forms and tax responsibilities you have to keep in mind. In previous blog posts, we’ve talked about the different forms and considerations you have to keep in mind when working with 1099 independent contractors (see our previous blog posts Business Taxes: 1099 Independent Contractors and Business Taxes: Form 1099-NEC to learn more if this describes your business).

In more recent posts, we’ve been discussing the requirements associated with employiong W-2 employees. To head to the start of the W-2 employee information, check out this blog post: Business Taxes: Employment Identification Number.

In this post, we’re going to talk about another facet of employment taxes: unemployment insurance.

Employment Taxes and Unemployment Insurance

As of January 31st, 2021, according to the IRS Page Employee Benefits, “the Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of the unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not withheld from the employee’s wages.”

This last sentence in the except from the IRS page is of particular interest: “Only the employer pays FUTA tax; it is not withheld from the employee’s wages.” This is an important distinction because this means that unemployment tax is not withheld from an employee’s wages like many of the other employment taxes such as medicare and social security taxes. You’ll want to remember that later!

The IRS Page Employee Benefits, as of January 31st, 2021, goes on to say that “the Department of Labor provides information and links on what unemployment insurance is, how it is funded, and how employees are eligible for it. In general, the Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law.”

The most important parts that business owners with employees have to keep in mind when it comes to unemployment taxes and unemployment insurance is, like we said above, that unemployment taxes are paid solely by the employer and are not withheld from the employee’s wages. Additionally, most employers must pay both federal and state unemployment taxes, so keep an eye out for your state’s taxes as well when you’re filing!

In our next blog post, we’ll cover another important topic when it comes to having employees: Workers’ Compensation. Check back soon for our next post!


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