How Does Unemployment Insurance Work for Employers?

Sometimes, individuals lose their jobs for reasons unrelated to job performance or conduct: for example, layoffs, business closures, downsizing, and more. Those former employees are entitled to limited financial support from the government while they seek alternative work. This is provided through unemployment insurance (UI), a joint federal-state program that is primarily funded through employer tax.

HR and financial teams are tasked with handling UI tax payments and managing all employment records and verification requests. Understanding the regulations that surround these processes is essential, as non-compliance could result in penalties and legal repercussions.

At Deel, we help over 35,000 clients consolidate and streamline HR, record-keeping, tax calculation, payroll, and benefits. Our range of US services, including Deel US Payroll and Deel PEO, are specifically built to centralize your workforce management operations and ensure compliance nationwide.

In this article, you’ll learn how UI is funded, who is eligible, tax implications, and your responsibilities as an employer regarding unemployment claims.

What is unemployment insurance?

UI is a program run collaboratively by the federal and state governments to financially assist employees who lost their jobs through no fault of their own.

Each state operates its own UI program, setting state-specific rules for eligibility, amount, and maximum length of financial support. The federal government provides broad oversight and sets the minimal standards the states must adhere to, as well as supplying additional funding in case of an emergency (such as a recession or a pandemic).

Who is eligible for unemployment insurance?

To be eligible for UI, individuals must:

• Have lost their job through no fault of their own
• Have worked sufficiently during a base period (usually 12-18 months), defined by the state
• Have earned a sufficient amount during the base period defined by the state
• Be actively looking for a job and be available to start immediately

Learn more about employment perks with our detailed piece on mandatory and voluntary benefits.

How is unemployment insurance funded?

UI is funded by taxes paid by the employer to the federal and state governments. The Federal Unemployment Tax Act (FUTA) determines the UI federal tax regulations, while state-specific rules are outlined in the State Unemployment Tax Act (SUTA).

Federal unemployment tax

FUTA tax is paid entirely by the employer to the federal government. Employers pay 6% on the first $7,000 USD of an employee's yearly salary. This means that each employee costs their employer a maximum of $420 per year. However, this amount can be reduced as many states allow a 5.4% tax credit that effectively lowers the FUTA rate to 0.6%.

State unemployment tax

In most states, the SUTA tax is also typically paid by the employer and can range from as low as 0.01% in Tennessee, to an upper range of 10.5% in Maryland. However, there are exceptions. In Alaska, New Jersey, and Pennsylvania, employees also make a small payroll contribution to state unemployment tax. In 2025, these employee contribution rates amount to 0.5% in Alaska, 0.425% in New Jersey, and 0.07% in Pennsylvania.

State variations

There are other differences between UI regulations across different states. For example, in 2025, unemployment benefits in most states have a maximum duration of 26 weeks (Arizona, Indiana, Maryland, and 33 others), but there are several states where the upper limit is different—Massachusetts goes up to 30 weeks, whereas Kentucky and North Carolina offer as few as 12.

Similarly, the wage base can range from $7,000 in Arkansas, to $55,300 in Idaho, and the maximum weekly benefits go from $235 in Mississippi to $1,079 in Washington.

You can find more information in our article about State Unemployment Insurance (SUI) tax rates.

What are employers’ obligations?

UI has significant implications for your company's taxes, record-keeping, and administrative load. Here, we take a look at what you should know:

UI tax obligations

HR and finance teams are responsible for handling all employers' FUTA and SUTA contributions. Payments must be made correctly and on time, as late payments can incur penalties that increase in size the longer you delay settling the debt.

Timely payments are also required to claim your FUTA tax credit, which can reduce overall obligations to 0.6%. You can claim this tax credit when filing your annual tax return with Form 940 (an employer's FUTA tax return form).

The employer's UI tax rate also depends on the number of former employee claims. In most states, too many claims can result in higher SUTA tax rates.

UI claim management

UI claims are processed through the state government, not through the federal government. For the employer, this involves the following:

• The state labor department sends you a notice requesting information about the termination of the employee who filed the claim
• The employer provides termination reasons (such as downsizing), confirming the employee has lost their job through no fault of their own (if true)
• The employer also provides their employee's work history (dates and wages) to allow the government to determine what benefits the former worker is entitled to
• The claim is resolved, provided responses are sent on time and there is no reason to appeal or dispute the claim

This process requires HR and finance teams to keep accurate and comprehensive records of their employees' time in employment.

Deel US Payroll streamlines payment and compliance for your US teams

Understanding your unemployment insurance obligations as an employer is key. This involves not just the financial aspects of taxes and payments, but also navigating former employee claims. By doing so, you can maintain compliance and demonstrate a commitment to supporting your workforce.

Staying on top of regulatory changes, admin, and accurate payments can seem daunting, especially as your workforce becomes more distributed nationwide. Deel's US payroll platform is designed to support you through every aspect of this process, from calculating your tax in any of the 50 states to streamlining payslips, employment history, and payments, all in one place.

To find out how, book a demo today.