Unemployment Insurance Business Guide

As a business, understanding the ins and outs of unemployment insurance and how it affects your employees is always important, but especially so during the COVID-19 pandemic.

  • When an employee loses their job, unemployment insurance pays out to ensure the individual is properly supported for the time being.
  • If you have employees, you are required to pay into State Unemployment Insurance (SUI) and the Federal Unemployment Insurance Act (FUTA).
  • To apply for unemployment benefits, employees will need to file a claim with their state’s unemployment insurance program.

In life, there are moments and roadblocks we never would have predicted. Take COVID-19, for instance: We are experiencing trying times, and many businesses especially are feeling the weight of the coronavirus pandemic.

No one plans to lay off staff or close their business, even if it’s only temporary. However, when a business shuts their doors or slows down for any reason, employees quickly become former employees. Unemployment insurance gives your workers some financial security while they’re without income.

For both  employers and employees, here is some valuable information on unemployment insurance.


Unemployment insurance came into effect nationwide as part of the Social Security Act of 1935 to assist the unemployed during the Great Depression and its recovery. It is a federally mandated and regulated program, but eligibility and payment amounts are determined at a state level.

In most states, unemployment benefits are funded through taxes employers pay on behalf of their employees. In some states, employees pay this tax. These taxes are directed to a state-controlled reserve fund. When an employee loses their job, the insurance will then pay out to ensure the individual receives some financial support for the time being.

The employer reserve fund, which is made up of 3% to 7% of an employee’s gross wages, depending on the individual state, is backed by a reserve fund controlled by the state.  If that fails, the federal government lends money to ensure unemployed workers are paid. All businesses must pay into unemployment insurance, except for certain nonprofits.

The concept of the original unemployment insurance benefit continues to operate in a similar manner as its 1935 inception; however, over the years, more rules, regulations, and reports have been added. Also, the unemployment division now covers payments for disability, Family and Medical Leave Act claims, workforce development, re-employment, and enforcement.


Many small business owners think they are exempt from unemployment insurance. However, if you have employees, you are required to pay into State Unemployment Insurance (SUI) and the Federal Unemployment Insurance Act (FUTA). All business sizes and types follow the same steps in paying SUI and FUTA, and handling unemployment claims. There are no exemptions for small businesses.

One of the biggest misconceptions held by many business owners and managers is that unemployment insurance is a fixed, uncontrollable tax. This concept could not be further from the truth. Unemployment insurance costs can be controlled from the moment a business starts.

For businesses, SUI is a quarterly tax that is part of the business’s payroll tax. The amount is determined by the state based on the type of business you operate and a wage base. Also taken into consideration is the number of ex-employees who have filed for unemployment claims. (A company with a high number of former employees requesting unemployment pays a higher rate than a company with low turnover.) In most states, this is an employer-only paid tax, but some states require employees to contribute.

FUTA taxes are also paid quarterly and are in addition to SUI. FUTA taxes are paid completely by the employer; it is not taken from employee wages. These taxes are reported to the IRS using Form 940. The business is taxed at 6% on the first $7,000 the employee earns, with a maximum annual pay in of $420 per employee.


Generally, when a company hires an employee, part of the new-hire process includes enrollment in either the state, federal or both unemployment compensation programs. Depending on the state’s requirements, new hires are periodically reported and placed on tax rolls, but each new hire must be reported to the state.

Subsequently, each time an employee has payroll taxes deducted from each paycheck, some of that money is used for the unemployment compensation insurance pool. Depending on the state where the employer or employee is located, benefits-eligible people will receive biweekly or monthly payments based on a formula [comprising] the employee’s rate of pay, cost of living and other statutory factors.


Most states have “at-will” employment laws, meaning the employee can leave or be terminated at any time for any reason that is not illegal. At-will employees are eligible for unemployment. The exception is if the departure is due to a disciplinary problem, such as insubordination, theft, and other serious charges.

If you terminate an employee, keep detailed documentation that protects the company if a claim is filed. Documentation is key. When documenting [an employee’s conduct], businesses should write up incidents as soon as they occur. That is, document who was involved, who witnessed what, where events occurred, when events occurred, what happened, why you think it happened and so on.


SUI and FUTA are paid only for payroll W-2 employees. W-2 employees, qualify for employer unemployment insurance if they are unemployed through no fault of their own and meet the state’s work and wage requirements, as well as any other eligibility requirements.

If you employed independent contractors or freelance workers (W-9 workers), they are generally not covered by unemployment insurance.

(How much a freelancer is eligible for varies depending on his or her previous income and their state’s unemployment laws. Individuals who worked as independent contractors or freelance workers are encouraged to contact their state’s unemployment office.)


To apply for these benefits, the first step former employees will need to take is filing a claim with the unemployment insurance program in their state as soon as they become unemployed. They will need to provide some information, such as who the former employer was, how long they worked there, the address of their former employer, etc. Once that info has been submitted, it generally takes two to three weeks before they receive their first benefit check


After an employee files a claim, the now-former employer, i.e., you, receives a “Notice of Unemployment Insurance Claim Filed” letter from the state. If you approve the claim, the funding comes from your tax account. (If that happens, your unemployment taxes will increase.)

You can accept or contest an unemployment claim request. If you accept it, no further action is necessary on your part. It is then up to the state to determine if the claim meets certain criteria (such as length of service, the reason for unemployment, etc.).

However, if you contest the claim – say the employee was let go for malicious behavior or quit for a new job that fell through – you need to inform the state why you’re contesting the claim, and you will need to provide details about the employee, including dates of service, job title, the reason for termination, and any notes or reports from the employee’s personnel record. Good record-keeping, including detailed performance reviews, is essential throughout the duration of an employee’s time with your business. As the employer, you have 10 days to contest the claim or risk an increase in unemployment tax.

When unemployment insurance is granted, the average compensation period nationally is 26 weeks, but each state determines the length of compensation time.


The steps involved with handling unemployment insurance can usually be found on each state’s website.  It is advised that any small business employer with unemployment insurance and tax questions to talk to an employment attorney in the state in which you employ individuals. The Department of Labor also provides links to the various state departments charged with handling the unemployment insurance for that state. “The overall takeaway is that unemployment insurance is not handled by insurance agencies but by a state governmental agency.”

*Contact UCM for any unemployment questions related to your business and we can explain how we can help with your unemployment insurance cost needs.