unemployment insurance

Unemployment insurance, at its root, is pretty easy to understand – it’s just a program meant to protect workers that become involuntarily unemployed. But because it is run on a hybrid state-federal system, and is often calculated based on weird variables like experience ratings, the entire concept quickly becomes muddled. Most states also change rates and maximum taxable wages on a year-by-year basis, so what was paid last year may not be the same this year. Thankfully, as long as you learn a little bit about unemployment programs and stay on top of those annual changes, UI shouldn’t cause too many problems.

If you hire someone, you probably need to pay for unemployment insurance

Nearly every profitable business needs to register to pay UI. States differ but, typically, once you pay more than $300 in wages, you are expected to pay for your state’s UI. Those wages, though, only include wages paid to an employee. So if you are self-employed, you do not have to buy yourself unemployment insurance, but you are not able to benefit from the system either. One way around this in most states is to structure your business as an LLC or Corporation, and then pay yourself as an employee of the business. Not everyone opts for that route, but some people appreciate the extra safety net created by a state-run unemployment program. Just check with your state before making any decisions, as they all have different laws related to their program.

There is typically a ceiling on wages for unemployment insurance

Basically, each state sets a maximum wage up to which you must pay unemployment insurance. So if your state’s maximum wage is $40,000/yr, and you have an employee making $50,000, you only have to pay unemployment insurance up to that $40,000 mark; everything above that is “excess wage.” You still have to report it but, for UI purposes, you do not have to pay based on anything about the ceiling. Maximum wages fluctuate wildly based on the state though – California sets theirs at $7,000, while Hawaii is up near $42,000. Chances are, though, that your state will tell you once the reported income passes that ceiling.

Insurance rates fluctuate each year

States differ as to how they calculate their rates for unemployment insurance, but most follow the same, basic format. Each state will effectively set a base or normal rate, usually in between the floor and ceiling rates, for the year. They then use an “experience” model and see how many of an employers ex-employees used their unemployment insurance over a given time, and tax heavier or lighter based on that. Just like with regular insurance, the more you use the state’s unemployment insurance, the higher your rate climbs. Thankfully the Federal system allows a percentage to be offset from what they collect depending on how much the state’s rate is, but make sure you calculate your SUI rate every year; otherwise, you could be hit with a serious fine.

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