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Terms and Definitions

What is Unemployment Insurance Tax?

Updated: February 28, 2022

Unemployment tax definition

Unemployment tax is payroll tax used to provide benefits for unemployed workers. There are federal unemployment taxes as well as state-level taxes.

More about unemployment tax

Even though states may collect unemployment taxes, the federal government collects and holds all proceeds from both federal and state levied unemployment taxes. Federally collected funds are used to pay for the operating and administrating unemployment programs through grants, and state revenue goes directly toward paying benefits. Companies are generally “experience rated”, meaning their rate can change, depending on how often their workers file a successful claim.

Using unemployment tax in a sentence

“Many economists feel that even those employees who don’t pay unemployment tax do still pay, in a sense, because employers compensate for the cost with lower salaries.”

Terms related to: Unemployment Insurance Tax

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