How Your Unemployment Tax Rates Are Computed

As business owners, taxes may seem like an inevitable fact of life. Much like how you have to buy gas to keep your car in motion, you have to pay your taxes to keep your business compliant with state and federal laws. Sometimes, you even have to spring for that premium level cost if your business has a hefty amount of unemployment claims.

The good news is that your unemployment taxes are the only taxes that you can control. On that note, by controlling that cost you can help your company spend its resources on more pressing costs that will help it continue to grow.

What to Know About Your Unemployment Tax Rates

What are Unemployment Taxes?

You have unemployment taxes because of the Federal Unemployment Tax Act, a federal law that imposes an employer tax to help fund state workforce agencies. You, as a business, report this tax annually by filing a Form 940 with the IRS.

What is My Unemployment Tax Rate?

Your tax rate can vary by state to state or by how many unemployment claims have been made against your company. Generally speaking, every state assigns a standard rate for employers newly in business.  The New Employer Rate may be assigned for 1-3 years.  After that, the rate for the following years are based on your own history of benefit charges and taxable payroll.

What are the 3 Components of My Unemployment Tax Rate as an Experience Rated Employer?

Most states look at the following three components in determining your tax rate:

  • Benefit charges paid
  • Taxable Payroll
  • Contributions (taxes) paid

What Can Affect My Unemployment Tax Rate?

If your company has high turnover and those former employees are drawing unemployment benefits, you will usually have a higher tax rate and vice versa. To really control your unemployment tax rate, you’re going to want to reduce the number of employees that are drawing benefits after they leave your company. There are other factors involved as well including, your industry, the age of your company, the State your company is in, and the contributions paid by your business.

We know that staying compliant with your federal unemployment taxes is not easy.   Managing and auditing your unemployment claims effectively will enable you to minimize the common errors that result in unnecessary penalties charged by the State agencies

If you have any concerns about your unemployment tax or would like to improve the processes to manage your unemployment claims, don’t hesitate to reach out to us at  Our range of software solutions can give you the freedom you need to self-administer your claim activities and maintain control over your UI costs today.