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What Is the Source of Unemployment Insurance Funds?

Unemployment compensation provides income to individuals who are no longer employed.
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  • Written By: Jeremy Laukkonen
  • Edited By: Andrew Jones
  • Last Modified Date: 28 November 2014
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The source for unemployment insurance funds can vary from one location to another, though public programs are usually paid for with taxes. In the United States, the majority of unemployment insurance funds are paid into by both federal and state taxes, though the exact source of those taxes can differ. One major source of taxes for these funds is employers, who typically pay a specific amount of money per hour that each employee works. Some states also levy unemployment insurance taxes directly on employees as well. Private unemployment insurance funds are usually supported by monthly premiums paid by each individual policy holder.

Unemployment benefits are a form of monetary compensation made to people who are out of work, typically by a local or national government. Each country that has unemployment benefits handles the situation differently. Some countries, including the United States, have unemployment insurance funds that pay these benefits. Other countries, such as Australia, pay these benefits out of funds that are allocated in the national budget each year. In both cases, the money that is used to pay the benefits is collected in the form of income taxes.

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The funding scheme for each unemployment insurance fund differs slightly, though the root source of the money is usually taxes. In the United States, each individual state manages its own unemployment insurance fund. One primary source for the money in these funds is business taxes, though some states also tax employees directly. Businesses are typically required to pay an amount of money based on how many employees they have, the amount of hours those employees work, and the job categories they fall into. Each category of jobs will typically have a per-hour dollar amount assigned that can be multiplied by the hours worked to determine how much the business pays into the fund.

Another source of money for unemployment insurance funds in the United States is the federal government. This money is used for three general purposes, including the administration of state programs, money that is paid directly into state funds, and loans for states that have unexpectedly high unemployment or funds that have become insolvent. All three categories of federal unemployment money come from taxes.

Aside from governmental unemployment insurance funds, there are also private plans. This type of unemployment insurance is typically optional, and requires each policy holder to pay a regular premium. Those premiums are the only source of money available to pay any claims. Insurance companies typically make a profit by gathering more money in premiums than they pay out in claims, and also through investments.

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