Employers pay most unemployment insurance taxes, not employees

In most states, only employers pay unemployment insurance (UI) taxes. Employees do not have UI taxes taken from their paychecks. The employer sends these taxes to the state unemployment insurance fund, which then pays benefits to workers who lose their jobs.

A handful of states — Alaska, New Jersey, and Pennsylvania — require employees to contribute a small amount as well. Even in those states, the employer still pays the larger share. The employee contribution is typically less than 1% of wages.

The tax money collected goes into a state trust fund. When you file for unemployment benefits, that fund pays out your weekly benefit amount. The employer's tax rate can go up or down depending on how many former employees from that company have drawn benefits — a system called "experience rating."

Key Takeaways

  • Employers pay unemployment insurance taxes in all 50 states; employees pay in only three states (Alaska, New Jersey, and Pennsylvania).
  • The employer tax rate varies by state and by individual employer, based on how many claims have been filed against that company.
  • New employers typically pay a standard rate until they have been in business long enough to establish a claims history.
  • Self-employed people do not pay unemployment taxes unless they are in a state that requires it, and they cannot draw unemployment benefits.

How employer tax rates are calculated

Each state sets its own unemployment tax rate range. Most states have a minimum rate (often around 0.5% to 1% of payroll) and a maximum rate (often around 5% to 6% of payroll). The actual rate your employer pays depends on the company's experience rating — the ratio of unemployment claims filed by former employees to the total payroll over a set period.

If many workers from a company have drawn unemployment benefits, the company's rate goes up. If few or no workers have drawn benefits, the rate stays low or at the minimum. This creates an incentive for employers to minimize layoffs and to contest claims they believe are invalid.

The wage base — the maximum amount of employee wages subject to the tax — also varies by state. In 2024, it ranges from about $7,000 to over $42,000 per employee per year, depending on the state. Once an employee's wages exceed the wage base for that year, the employer stops paying UI tax on additional wages.

What happens in the three states where employees contribute

Alaska, New Jersey, and Pennsylvania require employees to pay a portion of unemployment insurance taxes. In New Jersey, the employee rate is typically around 0.58% of wages. In Pennsylvania, it is around 0.06% to 0.13%, depending on the industry. Alaska's employee rate varies but is generally under 1%.

Even with employee contributions in these states, employers still pay the larger share. The employee contribution is deducted from the paycheck, similar to Social Security or Medicare taxes. The employer continues to pay its own separate rate based on experience rating.

New employers and standard rates

A brand-new company does not have a claims history, so it cannot be experience-rated. Instead, new employers pay a standard rate set by the state, usually somewhere in the middle of the state's rate range. This rate applies for the first few years until the company has enough payroll history for the state to calculate an experience rating.

Once a company has been operating long enough — typically three to five years, depending on the state — the state calculates its actual experience rating and adjusts the rate accordingly. A company with no claims may see its rate drop to the state minimum. A company with many claims may see it rise toward the maximum.

Some states also offer a reduced rate for employers in certain industries or for businesses that meet specific criteria, such as hiring workers from disadvantaged groups. These programs vary widely by state.

Self-employed workers and unemployment taxes

Self-employed people do not pay unemployment insurance taxes in any state, and they cannot draw unemployment benefits if their business closes or income drops. This is one of the key trade-offs of self-employment.

If you are self-employed and want unemployment coverage, you would need to set up a business structure that allows you to be an employee of your own company — a step that requires consultation with a tax professional or attorney and is not common.

Some states have experimented with voluntary unemployment insurance programs for self-employed workers, but these are rare and have specific may be able to access rules. Check your state's unemployment insurance agency website to see whether such a program exists in your state.

Federal unemployment tax (FUTA)

In addition to state unemployment taxes, employers also pay a federal unemployment tax called FUTA (Federal Unemployment Tax Act). The federal rate is 6% of the first $7,000 of each employee's wages per year. However, employers receive a credit of up to 5.4% if they pay their state unemployment taxes on time and in full, which brings the effective federal rate down to 0.6% in most cases.

FUTA revenue goes into a federal trust fund that helps states pay benefits during economic downturns when state funds run low. It also funds job training and reemployment services. Like state UI taxes, FUTA is paid entirely by the employer.

Why employers pay and what it means for workers

Unemployment insurance is designed as a social insurance program, not an individual savings account. The employer tax system spreads the cost across all businesses in a state, with rates adjusted so that companies with higher turnover or more layoffs pay more. This reflects the idea that unemployment is partly a cost of doing business.

Because employers pay the tax, not employees, workers do not see it deducted from their paychecks in most states. However, the tax is ultimately part of the total cost of employment, which can affect wages, hiring, and other employment decisions. Some economists argue that employer-paid taxes are passed along to workers in the form of lower wages than would otherwise be offered.

When you file for unemployment benefits, you are drawing from a fund that your former employer (and all other employers in your state) have been funding through these taxes. The amount you receive and how long you can receive it depends on your state's rules and your work history.

Frequently Asked Questions

Do I pay unemployment taxes if I work part-time or as a contractor?

Part-time employees are covered by unemployment insurance, and the employer pays the tax the same way as for full-time workers. Independent contractors and gig workers are not covered in most states — they are considered self-employed. Some states have created special programs for certain gig workers, but coverage is limited and varies by state.

Can an employer reduce its unemployment tax rate by not laying anyone off?

Yes. A company with few or no unemployment claims will have a lower experience rating and pay a lower tax rate. This creates a financial incentive to retain workers and avoid layoffs. However, the rate can only go down to the state minimum, so even companies with zero claims still pay something.

What if my employer goes out of business and owes back unemployment taxes?

If an employer fails to pay unemployment taxes owed, the state can pursue collection through liens, wage garnishment, or other enforcement actions. Workers who are owed benefits are generally still paid from the state trust fund, not directly by the employer. The state then tries to recover the money from the business.

Do nonprofit organizations pay unemployment taxes?

Most nonprofits pay unemployment taxes just like for-profit employers do. However, some nonprofits can elect to reimburse the state directly for benefits paid to their former employees instead of paying the standard tax rate. This option is available in most states and can lower costs for nonprofits with low turnover.

Does unemployment tax explore to wages paid in all states?

Unemployment tax applies to wages paid for work performed in a state. If you work in one state but your employer is based in another, the tax is typically owed to the state where the work was performed. Multi-state employers must register and pay taxes in each state where they have employees.