State Tax

• The majority of what an employer pays to fund unemployment insurance is in the form of a state tax. States require employers to submit a tax payment for each employee, along with other state paycheck withholdings. The unemployment tax rate varies from one state to another and usually only applies to the first $10,000 a worker earns. Rates are also different for different industries. Employers who operate a business in a stable industry with a low level of employee turnover pay less while those who do business in an industry that sees workers often experiencing periods of unemployment pay a higher rate to account for the increased likelihood that their workers will take advantage of unemployment benefits at some point.
  
  

Federal Tax

• Employers also pay a federal tax to fund unemployment on the federal level. Federal unemployment resources go toward extensions to state benefits in times of special economic need or when states experience an unusually high number of unemployment claims. As of 2010 the federal tax on employers is 0.8 percent of a worker's earnings up to $7,000 a year. This means that all workers who earn $7,000 or more a year cost their employers $56 in unemployment taxes. Employers must submit federal unemployment taxes along with other paycheck withholdings, including Social Security deductions and income tax withholdings.
  
  

Regressive Taxes

• Both state and federal unemployment funding taxes are regressive. This is because they charge the same rate for all employees above a certain income level. In both cases, the income levels are set low so that the majority of workers, including full-time workers who make minimum wage, fall above the threshold and cost their employers the same amount of unemployment tax as workers who earn much more. Because unemployment taxes may restrict an employer from offering higher wages, this regressive tax figures into wage issues and debates over tax fairness.
  
  

Significance

• Unemployment benefits that states pay are based on workers' recent incomes and help prevent problems such as foreclosure, loan delinquency and bankruptcy. Because unemployment insurance gets its funding directly from employers, it places much less of a burden on federal and state budgets. Employers with more workers, and therefore more possible unemployment cases, pay more to the state and federal funds. In addition, the longer a worker has a job, the more she contributes to unemployment funds through the tax her employer pays.