State Unemployment Taxes

Each state operates its own unemployment compensation program that is funded largely by taxes on employers. So, if you have employees, you should expect to pay some state unemployment taxes. These taxes are in addition to any federal unemployment tax you may owe.

For the most part, state unemployment taxes are imposed directly on employers and you don't withhold these taxes from your employees' wages. Currently three states, Alaska, New Jersey, and Pennsylvania also assess unemployment taxes on employees. If you happen to have employees in Alaska, New Jersey, or Pennsylvania, you will also be withholding some unemployment taxes from your employees' wages. New Jersey also includes a disability insurance tax as well.

Small employer exemptions. In most of the states, if you're subject to the federal unemployment tax (i.e., you have at least one employee for 20 calendar weeks during the current or preceding calendar year, or you pay at least $1,500 in wages during any calendar quarter in the current or preceding year), you're automatically liable for the state unemployment tax. In the remaining states, broader tests for taxability are applied. So, if you happen to be in one of those states, you may end up paying state unemployment taxes even though you're not obligated to pay the federal tax.

Computing the tax. Calculating what you owe in state unemployment taxes is simply a matter of multiplying the wages you pay each of your employees by your tax rate. However, every state limits the tax you must pay with respect to any one employee by specifying a maximum wage amount to which the tax applies. Once an employee's wages for the calendar year exceed that maximum amount, your state tax liability with respect to that employee ends.

State unemployment tax rates are individually assigned to each employer each year, and every state uses an experience-rating system of some kind to determine an employer's applicable tax rate for the year. Although these systems vary in how they're actually administered, they share the goal of assigning lower tax rates to employers whose workers suffer the least involuntary unemployment and higher rates to employers whose workers suffer the most involuntary unemployment.

However, if you're new to the system because you've only recently hired your first employees, you'll pay tax at a fixed rate until you've contributed to the state's unemployment compensation program for a specified period of time (generally one to three years, depending on the state) and established "experience" with your employees and unemployment.

Save Money Keeping the number of unemployment insurance claims filed by former employees to a minimum can produce significant payroll tax savings. For example, in all states the most favorable unemployment tax rates are 1 percent or less. Let's assume that you're in a state where the taxable wage base is the first $8,000 paid to each employee and that you earn a favorable rate of 0.1 percent. If the generally applicable rate is 5.4 percent, you're essentially saving $424 ($8,000 x 5.3%) with respect to each employee who earns $8,000 or more. So, how do you achieve and maintain a favorable experience rating? One key is to hire only those employees whom you really need and who are qualified for the job. Also, you should monitor all unemployment insurance claims made against your account and should be prepared to contest any claims you believe to be improper.

State tax information. Click on your state on the map below for general information about its unemployment tax. The information includes:

1. a short description of the employment level required to subject you to the state's tax,
2. the range of the state's tax rates and, if available, the rate assigned to employers not having an experience rating,
3. the maximum wage amount to which the state's tax applies,
4. the withholding rate on employees (where applicable), and
5. the address and telephone number of the agency that administers the state's tax.