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Paying Unemployment Taxes

The Federal Unemployment Tax (FUTA) fund and state unemployment funds require employers to pay taxes to fill those unemployment funds. For FUTA, employers pay a federal rate of 6.2 percent on the first $7,000 that each employee earns. Luckily, the amount you pay to the state can serve as a credit toward the amount you must pay to the federal government.

Each state sets its own unemployment tax rate. Many states also charge additional fees for administrative costs and job-training programs. You can check out the full charges for your state at PayrollTaxes.com.

States use four different methods to calculate how much you may need to pay in FUTA taxes:

  • Benefit ratio formula: The ratio of benefits collected by former employees to your company’s total payroll over the past three years. States also adjust your rate depending upon the overall balance in the state unemployment insurance fund.

  • Benefit wage formula: The proportion of your company’s payroll that’s paid to workers who become unemployed and receive benefits, and then divides that number by your company’s total taxable wages.

  • Payroll decline ratio formula: The decline in your company’s payrolls from year to year or from quarter to quarter.

  • Reserve ratio formula: Your company’s balance in the unemployment reserve account. The reserve account is calculated by adding up all your contributions to the account and then subtracting total benefits paid. This amount is then divided by your company’s total payroll. The higher the reserve ratio, the lower the required contribution rate.

These formulas can be very complicated, so your best bet is to meet with your state’s unemployment office to review how your company’s unemployment rate will be set. In addition to getting a better idea of what may impact your FUTA tax rate, you can also discuss how best to minimize that rate.

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