What is State Unemployment Tax?

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  • Written By: Kathy Heydasch
  • Edited By: O. Wallace
  • Last Modified Date: 02 October 2019
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A state unemployment tax is paid to a state government by employers in order to finance unemployment compensation funds. State governments pay unemployed workers a subsidy for living provided the circumstances of their job loss meet certain criteria. The funds for these payments come from the state unemployment tax charged by the government and paid by employers.

Every state in the US has a department or agency responsible for collecting taxes such as the state unemployment tax, similar to the Internal Revenue Service’s role for the US government. Employers must periodically pay a state unemployment tax based upon a pre-determined percentage of the company’s gross payroll up to a certain threshold per employee. For example, a company with a state unemployment tax rate of 1.5% might pay that tax on the first $10,000 US Dollars (USD) in wages paid to a particular employee. After that threshold, no state unemployment tax is paid. Rates and thresholds vary by state and company.

If an employee is laid off or fired for unjust reasons, he or she can apply to the state government for unemployment compensation. Once the case is reviewed and approved, this would result in a subsidy check or debit card for an amount equal to a certain percentage of the wages earned while at the previous job. If an employee is fired without cause or decides to resign, the state can elect to deny unemployment compensation for that individual.


The state unemployment tax rate can be adjusted by the state at any time and typically takes place retroactively. For example, if a state government has an excess of unemployment claims and not enough funds to pay them, it might increase the state unemployment tax for a quarter. Employers must adjust their payroll modules to account for any change.

A state does not indefinitely pay unemployment benefits to an individual. The stipulation for the length of time that a government will pay benefits is typically established by the federal government. The length of time that a person can draw unemployment compensation can be controversial. Some feel that unemployment compensation reduces the incentive that a potential employee has to look for a job.

Typically, the recipient of unemployment compensation will be assigned an interviewer who will follow up with the employee in order to ensure that the employee is actively seeking work. The recipient must prove to the interviewer that he or she has been submitting resumes or applications and going to interviews when possible. Some unemployment agencies may assist the job seeker in the search for employment.


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