Employers fund the “unemployment system” by paying Federal and State unemployment payroll tax. Federal tax provides the operating and administrative funds for each respective state agency. Federal guidelines set minimal benefit standards and maintain oversight of each individual state unemployment program. This tax also funds extended benefit subsidies, when applicable, and provides loans to states that run out of monies to pay benefits.
State tax goes directly into an employer’s individual unemployment tax account. Employers must maintain an active account in each state of operation, which is directly chargeable for benefits paid to former employees. Every state unemployment agency has governing powers over the collection of unemployment tax as well as processing all claims filed by employees.
The state agency must decide if those filing for benefits are qualified, eligible or entitled to benefits. They must also provide equal rights of appeal for all decisions for both claimants and employers. This starts the claims process and time lines that directly impacts an employer’s future tax rates and expense. All states require claimants to monetarily qualify for benefits and to show genuine attachment to the workforce, but qualifying monetarily does not mean claimants will receive unemployment benefits.
In each state of business, an employer maintains a separate and specific tax account. They pay monies into this account in the form of taxes. Former employees, or claimants, draw monies out of this account in the form of unemployment benefits.
The process of employer tax dollars flowing into the account and claimants drawing dollars out of the account is known as unemployment experience. This experience on a fiscal year basis determines the employer’s tax rates for future years. The more benefits that are drawn out of the account, the higher the employer’s tax rate and costs. Reduce the flow of benefits and you can lower the tax rate and costs.
Excerpted from the Michigan Chamber’s Unemployment Insurance Guide for Michigan Employers authored by F.A.R. Management, Inc.