Why Should You Care?
Every business owner is required to report all wages to their state's Department of Labor; this is usually done on a quarterly basis. When you file these reports, your state sets a percentage to determine what amount you pay to the unemployment division along with those quarterly reports.
When you first start a business, your state's unemployment office will set the percentage you have to pay either on similar businesses in your area if you are a new business, or if you purchased an existing business, they will use a history of reported wages.
Say you have quarterly wages of $25,000 and your percentage is 3%. Of that $25,000, you will be required to pay 3% to the Department of Labor until excess wages are reached. Excess wages are set by each state. For example, in New Mexico, every employer must pay their set percentage on all wages until an employee reaches $19,200 in any given year. Once an employee reaches $19,201, these are considered excess wages and are deducted from the total wages paid in any given quarter. These excess wages are not subject to the 3% due to the state.
When an employee files for unemployment and receives it, can't find a job, and continues to receive unemployment compensation, the wages paid out to that former employee affect your percentage. The more ex-employees that receive unemployment, whether they are entitled to it or not, will make your percentage rise. This means that the following year, the percentage you pay quarterly on wages paid will rise. That 3% you initially started with may jump to 5% before you know it. Percentages and how they are increased vary from state to state.
No employer wants to pay large sums to the Department of Labor, especially when it is due to ex-employees who receive unemployment insurance they don't deserve.