Unemployment insurance assists workers who become involuntarily unemployed and meet specified eligibility requirements. Unemployment insurance programs are run as federal-state partnerships financed through payroll taxes.
The federal unemployment insurance (UI) trust fund finances the costs of administering unemployment insurance programs, loans made to state unemployment insurance funds, and half of extended benefits during periods of high unemployment. Unemployment insurance programs pay benefits to covered workers who become involuntarily unemployed and meet specified eligibility requirements, such as actively looking for work.
UI is structured as a partnership between the federal government and states and territories. States and territories set the parameters of their unemployment programs within federal guidelines, including payroll tax rates and wage bases for covered workers. State unemployment insurance taxes are paid by employers and remitted to the federal UI trust fund, where each state has a separate account for covering normal unemployment insurance benefits.
In addition, a 6 percent federal payroll tax, known as the Federal Unemployment Tax Act (FUTA) tax, is levied on the first $7,000 of covered workers’ earnings. Employers remit the tax but usually can claim credits against 5.4 percentage points of FUTA taxes paid in states with unemployment programs that meet federal standards. The effective FUTA tax rate thus shrinks to 0.6 percent, or a maximum of $42 per worker. However, some states have outstanding balances on loans taken from the Federal Unemployment Trust Fund and may receive a credit reduction. The federal fund is used to cover administrative expenses, make loans to states that deplete their own reserves, and cover half of extended unemployment benefits made available when states experience prolonged periods of high unemployment. (States cover the other half of these extended benefits.)
States can borrow from the federal fund if their own reserves are insufficient. When the Great Recession and the long period of high unemployment that followed hit state UI reserves particularly hard, 36 states borrowed from the federal fund. Also, during 2020 and the COVID epidemic, 22 states took out advances. Loans from the federal fund can be repaid by reducing the credit employers can claim against FUTA taxes and through other add-ons. States can also take private loans to shore up reserves.
Updated January 2024
US Department of Labor. 2023. “Unemployment Insurance Tax Topic.” Washington, DC.
US Department of Labor. 2022. “State Unemployment Insurance Tax Measures Report, 2021.” Washington, DC.
US Department of Labor. 2023. “State Unemployment Insurance Trust Fund Solvency Report.” Washington, DC.
Vroman, Wayne. 2018. “Unemployment Insurance Benefits.” Washington, DC: Urban Institute.