As a small business owner and employer, you may wonder what can happen if your former employee files for unemployment. How will this affect them – and what about you?
The unemployment filing process and outcomes (approval or denial) can vary, so let’s talk about them!
At CSI Accounting & Payroll, we’ve worked with small business taxes for over 50 years. That means we’ve gotten tons of questions about unemployment tax benefits, including:
- Who can file for unemployment? What about 1099s and part-time employees?
- What do I need to know about unemployment tax rates?
- What happens when my former employee files for unemployment? How often do employees win unemployment appeals?
Who Can File for Unemployment Benefits
Many employers want to know who is eligible for unemployment benefits. If you have employed someone in the last four years – even if they were employed at other businesses after yours – they may be able to draw benefits from unemployment and have it apply to your tax rate.
First, we need to address a common misconception. Your business doesn’t have an “unemployment account” with a balance, per se – you just have your tax rate adjusted when former employees draw unemployment benefits.
It’s also important to note that unemployment is for employees who get laid off, not for those who quit or are rightfully terminated or fired. Employees who quit sometimes receive benefits anyway, but it should not affect your rate.
Aside from those points, it’s important to talk about 1099s and part-time employees drawing unemployment benefits.
1099 (Independent Contractor) Unemployment
Can 1099s claim benefits that affect your unemployment tax rate?
No! Independent contractors are considered self-employed, so they can’t do this even if you end a contract with them. There are generally no circumstances where an independent contractor can claim unemployment benefits against you.
Part-Time Worker Unemployment
Can part-time employees claim benefits that affect your unemployment tax rate?
Yes! They are your employees, so they can claim benefits under qualifying circumstances. However, they will typically get less benefits than full-time employees since they usually make less money. (Unemployment benefits are based on their earnings.)
Don’t get part-time workers’ unemployment confused with partial unemployment, though! Requirements for partial unemployment vary by state, but it typically can be claimed if an employee (outside of their control):
- Loses a full-time job and can only find a part-time job
- Has multiple part-time jobs and loses one
- Is scheduled for zero hours
Unemployment Tax Rates
As a business, you pay into state unemployment tax that your employees may be able to draw benefits against if they become unemployed under the qualifying circumstances we mentioned above.
You receive reports on how much of these taxes you’ve paid in versus how much has been paid out to former employees.
Note: You do not receive federal reports. The federal unemployment office is used to supplement state unemployment offices when needed.
How much does your business pay in unemployment tax? The calculation generally looks like this:
Unemployment tax rate = Your state’s base rate + (Your experience rate OR The new employer rate for your state and industry)
A base rate, or default rate, applies to all businesses in a certain state. Not all states use this, but many do – like Minnesota.
The experience rate is based on what’s shown in your quarterly report: taxes paid in versus how much has been paid out and normally only change once a year, but not always. State unemployment agencies will notify you about all rate changes. The formula is similar in many states. Here is the one for Minnesota, for example:
Experience rate = (Benefits paid in the last 4 years / Taxes paid over the last 4 years) * 1.25
If you don’t have an experience rate because you’re a new employer, you can use your state’s new employer rate, which also varies by industry. As an example, Minnesota’s new employer rate is 1% - 8.9% for 2024.
You also need to factor in the limit on the wages that are taxable per employee. This varies a lot by state. For example, in Minnesota, it is $42,000 for 2024. Once an employee earns more than this, you don’t pay unemployment taxes on any wages above that limit.
Business Process of an Unemployment Claim & Who Wins Unemployment Appeals
When your former employee files for unemployment, if you’ve employed them in the past four years, you’ll receive a letter from your state’s unemployment office asking you to confirm their earnings from your business.
Not Raising an Issue
If the former employee is granted benefits, it will increase your experience rate for future years. No other expenses are on your shoulders.
Raising an Issue
If you don’t think the claim should go against your unemployment tax rate, then raise an issue immediately upon receiving the letter. (Many states only allow 10 days to do this, so be quick! Once a determination is made, there is nothing you can do to change it.)
If the former employee wins, the longer they collect unemployment within 4 years of them working for you, the more goes against your tax rate. Over the years, the government has made it easier and easier for people to receive and stay on unemployment benefits. This should be a huge motivator to raise an issue.
If you raise an issue, you may need to attend a virtual hearing and explain your case. While the judges often side with the former employee, it depends on the severity of the case. In extreme cases, we recommend standing your ground and raising an issue. Ultimately, it’s up to you to decide whether or not fighting the claim is worth it.
Here are some cases when former employees may win the claim:
- They were fired because they were incompetent and could not do the work. (Don’t let this scare you away from firing a bad fit! The increase in your unemployment tax rate will be tiny compared to the cost of keeping the wrong person on your payroll.)
- They filed a claim and their former employer did not raise an issue.
On the other hand, employers may win the claim in these cases:
- The former employee quit. (Remember, former employees who quit sometimes receive benefits anyway, but it should not affect your rate.)
- The former employee stops coming to work. If an employee doesn’t come to work or communicate why for consecutive days it’s considered job abandonment and handled the same as quitting.
- The former employee was fired because of extreme misconduct.
- The former employee was fired because of extreme negligence.
Payroll Tax Advice Is a Call Away
Payroll taxes (including unemployment) can get complicated! It helps to have an expert on your side for advice in complex situations, too.
Now that you know who can file for unemployment, what your unemployment tax rates are like, and what you need to do when your former employee files for unemployment, are you ready to check out payroll services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn why doing your own payroll is a huge mistake.
