Unemployment in the United States during COVID increased faster and higher than it did during the Great Recession. Minority groups (i.e., women, immigrants, black people) faced a greater impact from unemployment than other groups (Pew Research Center).
Whether your business already covers unemployment benefits or are overwhelmed by unemployment claims, here is a general overview to help you understand everything you need to know.
Unemployment benefits are temporary payments to employees who are unemployed by no fault of their own to help alleviate lost wages.
First and foremost, unemployment benefits begin when an employee is hired, not terminated. Once an employee is hired, you must report them to your state. Federal and state unemployment taxes are required for each employee.
Federal Unemployment Tax Act (FUTA) tax is the responsibility of the employer. It Is 6% of the first $7,000 each employee earns annually. Most employers are eligible to receive a tax credit of up to 5.4%, lowering the FUTA tax to $42 per employee per year (as opposed to $420 per employee per year).
State Unemployment Tax Act (SUTA) taxes vary by state. Most SUTA taxes require employer-only contributions; however, some require employee contributions, too. SUTA tax rates are typically determined by professional experience, industry, and number of unemployment claims filed by former employees.
Addressing Worker Misclassification
Independent contractors are not eligible for unemployment benefits.*
*NOTE: The Coronavirus Aid, Relief, and Economic Security (CARES) Act extended unemployment benefits to independent contractors. See “Legislative Updates” section for more information.
Misclassification of workers is becoming commonplace. So, what happens if you misclassified an independent contractor when they should have been classified as an employee?
Independent contractors are not paid overtime wages or have proper taxes withheld and contributed. As a result, if a worker is misclassified and a court rules in the worker’s favor, you could face penalties, interest, and back taxes. Requirements for back-pay for unemployment insurance and workers’ compensation premiums are handled on a state-by-state basis.
To avoid worker misclassification, learn more about the difference between an independent contractor and an employee.
Process for Filing an Unemployment Claim
When an employee files an unemployment claim, you will receive a notice from your state unemployment agency.
You can either (1) accept the claim, or (2) contest it.
Here are some reasons you may accept the claim:
· The employee was laid off due to lack of available work
· The employee was laid off due to business financial constraints
· The employee was terminated or voluntarily quit
If you accept the claim, no further action is typically needed.*
Here are some reasons you may contest the claim:
· The employee was terminated for misconduct
· The employee voluntarily quit for alternative employment
· The employee’s claim contains false information
· The individual is classified as an independent contractor
If you contest the claim, you must respond to the state unemployment agency within the timeframe listed on the notice. Late responses could lose your right to contest the claim. To contest a claim, you will need to provide documentation to support your decision, such as:
· Details of termination
· Employee compensation, job title, and dates of employment
· General information about your company
The state unemployment agency may contact you requesting more information or an unemployment benefits hearing.
*NOTE: Accepting an unemployment claim does not guarantee that the employee will receive unemployment benefits. The final decision to provide unemployment benefits is at the state’s discretion.
On March 27, 2020, the federal government passed the CARES Act, which provided additional unemployment benefits to U.S. employees. These benefits included:
· Direct cash payments up to $1,200 for each qualifying adult, plus $500 for each child 16 years of age or younger
· An additional $600 per week on top of state unemployment benefits through July 31, 2020
· Expanded unemployment benefits that added up to 13 weeks of unemployment benefits on state-provided benefits – up to 39 weeks
· Extended unemployment benefits to self-employed and gig workers
Some states like Georgia, Hawaii, Kentucky, and Nevada offer nearly half the average maximum weeks (26) for unemployment benefits, but also fall within the mid-range for maximum weekly benefit payments ($300-$500 range). States like Massachusetts, Pennsylvania, Rhode Island, and New Jersey offer more generous benefits (above average). Explore state-to-state unemployment benefits comparison.
Unemployment claims and management of such claims can be tedious and complex, especially when you’re likely trying to focus on recovering and sustaining your business. QBS can offer you unemployment claims management and other tax reporting services. Allow our unemployment and tax specialists undertake these mundane yet necessary tasks and let you return to business activities that strengthen your bottom line.