What Small Businesses Must Know About Unemployment Insurance

The United States has 30.7 million small businesses that employ a massive portion of the entire working population. But business is inherently risky and small business owners need to be aware of all the risks and uncertainties of the small business world. Covid-19, for instance, has hit the small businesses hard resulting in 31% of these businesses being non-operational.

Clarity about insurance is of the utmost significance to deal with such uncertainties and possible damages. Among the insurance options out there, unemployment insurance is something that many small business owners don’t know a lot about.

Let’s change that in this post!

What is Unemployment Insurance?

Unemployment insurance is a part of the Social Security Act, 1935. It is a Federal mandate; however, states determine the eligibility and payment amounts. In the majority of the US states, employers pay the taxes for their employees to fund the unemployment benefits. In a few states, the employees have to bear such taxes to contribute to the state reserve funds. If an employee loses their job, they are entitled to receive financial assistance as part of the unemployment insurance benefits. The insurance does not cover employees who quit their jobs or are terminated by the organization for a viable reason.

Applicability for Small Businesses

Many small business owners falsely believe they are exempt from Unemployment Insurance. However, all small businesses with two or more employees need to abide by the state and federal regulations on Unemployment Insurance. The relevance of this instrument has further gone up after Covid-19!

Small businesses have been badly hit and many employees have lost their jobs as a result. Obviously, unemployment insurance comes into the picture when an employee loses the job without their own contribution, such as the shutdown of the business due to a natural calamity or a pandemic.

Process of Paying for an Unemployment Insurance

Small business owners need to pay unemployment taxes on behalf of their employees. That is the employer’s contribution towards the general unemployment insurance reserve funds. Several factors are involved in the determination of the percentage of unemployment insurance that a small business has to pay. For example, the percentage can vary in the range of 1.6-6.2% from one state to the other. Small businesses’ unemployment claim rates can also have an impact on these taxes. Small business owners must consider and evaluate all these factors to determine their share of the reserve funds.

Impacts on Tax Rates

The unemployment insurance tax percentage for a small business can potentially increase with every lay-off by the organization. A delay in settling unemployment insurance claims can also have adverse implications on the tax rates. Of course, it’s not possible to reduce the unemployment insurance taxes below the legally applicable limits. However, a small business can keep certain aspects in consideration to avoid penalties. Business owners must make it a point to pay the state unemployment insurance taxes within the specified time frame. Also, if the organization fires an employee, they need to have a valid reason for the same.

Eligible Employees under Unemployment Insurance

It is also important for small businesses to understand the employees eligible for unemployment insurance benefits. Employees who quit their jobs may not qualify. Also, if employees engage in any illegal activity and get terminated by the organization due to the same they do not qualify for unemployment insurance benefits. Employee termination due to disciplinary issues, such as theft, insubordination, etc. also does not provide unemployment insurance benefits.

Small businesses must maintain a record of all their employee termination. Detailed documentation of all the incidents that led to the employee’s termination is necessary.

The eligibility of the part-time, on-contract, and freelance workers for unemployment insurance benefits is always a matter of concern. Small businesses need to pay state and federal unemployment insurance taxes for all of their payroll W-2 employees. Freelance and contractors are W-9 workers and are usually not eligible for unemployment insurance benefits.

Settling Unemployment claims for former employees

Former employees of small businesses can file unemployment insurance claims. Small businesses must have an understanding of the process that follows. The small businesses will get to know of such claims through an official document from the states called the Notice of Unemployment Insurance Claim Filed.

As a small business owner, one has the right to accept or contest such claim requests by their former employees. Small businesses need not take any further steps in the case of acceptance. In the case of non-acceptance, the organization must inform the state of its decision to contest the claim. The business will have to provide all the documents justifying the non-eligibility of the employee to file such a claim. For example, an organization may terminate an employee on charges of theft. The organization must provide evidence to the state substantiating these charges. All of these submissions must be made within 10 days of receiving the letter from the state.

To Sum it Up

It goes without saying that all businesses need to comply with all the applicable laws and regulations. That’s why small businesses must make it a point to comply with the Unemployment Insurance laws. That will keep their tax rates in check and provide some succor to employees who lose their jobs if bad times arrive.