Where does the money for unemployment benefit programs come from? Many states have used federal coronavirus relief money to replenish unemployment trust funds, while others have borrowed billions of dollars in the past few years. The state of Pennsylvania, for instance, repaid $2.8 billion in bond funds used for unemployment benefits during the Great Recession and announced plans to borrow another $2.8 billion within three months to get through October. By 2020, states will be required to pay only 1.8% of state unemployment insurance tax, a decrease of nearly half since 2012.
State unemployment funds aren’t subject to balanced budget rules, and states can borrow from the federal government when their funds are exhausted. These loans are interest-free, but states must repay the funds within two to three years, and federal taxes on employers will rise until they pay off the debt. During the Great Recession, more than thirty-five states borrowed money from the federal government to cover unemployment benefits. In February 2020, many states owed the federal government almost $50 billion in unemployment benefits. In that year, California, New York, Texas, and Illinois were the states with the highest unemployment loan debt, each owing to the federal government more than $7 billion.
While unemployment benefits may seem like a great idea, they’re not as beneficial for employers as many think. Employers pay FUTA taxes on the first $7,000 of income paid to an employee. In exchange, states are given a “credit” of up to 5.4% of their employees’ taxable income. This helps offset the costs of paying for unemployment insurance.
States collect FUTA taxes from employers. These taxes are equal to six per cent of the first $7,000 that each employee makes in a year. The maximum contribution is $420. Business owners may qualify for tax credits in some states, depending on the number of employees and how many workers claim unemployment benefits. For this reason, the state unemployment fund is crucial to the health of an economy.
While unemployed individuals may not qualify for UI, they can still qualify if they have worked in a high-paying position. In most cases, self-employed individuals are not eligible for this benefit, making it even more important for employers to pay attention to their employees’ needs.
For this reason, many employers use an outsourced UI claims management company. However, lowering unemployment costs is still possible through proactive measures, such as hiring the right people and providing specific feedback to employees. The goal of keeping workers is both a win-win situation for employees and employers.
Federal and state revenue funds the basic unemployment insurance program. Unemployment insurance benefits provide workers with up to 26 weeks of unemployment compensation, approximately half their average weekly wage. These programs are a partnership between the federal and state governments.
While the federal government provides funding for administrative costs, state unemployment insurance programs are largely governed by state laws, and states are free to set their eligibility criteria and benefit levels. For this reason, the federal government’s funding for unemployment benefits is a fraction of the overall cost.