State Unemployment Insurance (SUI) 101
The Social Security Act, passed in 1935, requires for-profit employers to provide a maximum of 26 weeks of unemployment to separated employees through state-run unemployment insurance programs. States pay unemployment benefits from pools of funds they reserve for qualified unemployment benefits payouts (unemployment insurance claims). States raise these funds by levying a payroll tax (benefits premium) on most employers. What an employer pays in taxes is based on state-by-state standards that include varying tax rates, layoff histories, and taxable wages. Every year states produce a tax table with a range of tax percentages.
Every employer in the state is assigned an annual tax rate (based largely on past unemployment experience – history of layoffs – and other state and national economic factors.) The revenue collected through these state unemployment insurance (SUI) taxes (unemployment insurance premiums) are reserved and pooled together. The states use the pooled funds to cover unemployment expenses for all employees.
It wasn’t until 1972 that Social Security Act was amended to require all employers (not just for-profit employers) provide unemployment benefits. However, the amendment gave three classes of employers the legal right to manage their unemployment benefits outside of the state-run programs:
- 501(c)(3) Public Charities
- Public/Government Entities
- Tribal-Owned Businesses
Because the federal government believes that these three employer groups layoff fewer employees, they are granted the legal option to manage their unemployment outside of the state-run unemployment insurance programs. Unemployment benefits are still paid directly by the state. After the state pays benefits (claims) to an unemployed employee, it then bills the past employer(s) for reimbursement. The employer is not assessed an unemployment insurance tax (benefits premium) on their taxable payroll. They do not send funds to the state unemployment insurance pool.