Employers pay for unemployment insurance. In 47 states, the payroll taxes that fund the system come entirely from employers; only Alaska, New Jersey, and Pennsylvania also withhold a small amount from workers’ paychecks. Self-employed people fall outside the system: they don’t pay in, and with one narrow disaster-related exception, they can’t collect. So the short answer to who pays for unemployment insurance is your employer, at both the federal and state level, with a modest employee share in three states.
The Federal Piece: FUTA
Every employer owes a federal unemployment tax of 6% on the first $7,000 of wages paid to each employee in a calendar year.1Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax Wages above $7,000 aren’t subject to the tax.2GovInfo. 26 USC 3306 – Definitions
Almost no employer actually pays the full 6%. Businesses that pay their state unemployment taxes on time receive a credit of up to 5.4% against the federal tax, dropping the effective rate to 0.6%.3Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax That works out to a maximum of $42 per employee per year. The federal share pays for administering state unemployment offices, not for the benefits themselves.
The State Piece: Where Most of the Money Comes From
The larger share comes from state payroll taxes. Each state sets its own rates, wage bases, and rules, so what an employer owes depends heavily on where the business operates. State taxable wage bases run from $7,000 (matching the federal floor) up past $78,000.
What ties an individual employer’s rate to its own behavior is the experience rating. States track the taxes each employer has paid, subtract benefits charged to that employer’s former workers, and divide the result by the employer’s average taxable payroll. Employers whose former workers rarely collect benefits get a lower rate; employers with heavy claims histories get a higher one. Rates for established employers can run from close to 0% to above 10%.
Businesses new enough that they haven’t built up a claims history are assigned a default new-employer rate, generally between 1.25% and 5.4% depending on the state and industry. Construction, seasonal hospitality, and other high-turnover sectors often start higher. Most states switch new businesses to experience-based rates after one to three years.
The Three States Where Employees Also Contribute
Alaska, New Jersey, and Pennsylvania are the only states that withhold a share of unemployment tax from employees’ paychecks. The employee rates are small next to the employer’s share:
- Alaska: 0.50% of wages
- New Jersey: roughly 0.38%
- Pennsylvania: 0.07%
These appear as a separate line on the pay stub and flow into the state’s unemployment fund. If you work in any other state and see an “unemployment” deduction on your paycheck, it’s more likely a different program (state disability or paid family leave, for instance) or a payroll error.
Self-Employed Workers
Sole proprietors, freelancers, and independent contractors don’t pay FUTA or state unemployment taxes on their own earnings. Unemployment taxes apply to wages an employer pays an employee, so working for yourself puts you outside the system. Because you don’t pay in, you generally can’t collect if your business income drops.
The one narrow exception is Disaster Unemployment Assistance, which can provide temporary benefits to self-employed workers after a presidentially declared major disaster. Outside that scenario, there is no standard unemployment safety net for the self-employed.
Household Employers
If you hire someone to work in your home — a nanny, housekeeper, or caregiver — you may owe FUTA yourself. The trigger is $1,000 or more in total cash wages to household employees in any calendar quarter.4Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide Once triggered, FUTA applies to the first $7,000 paid to each worker, and you pay it out of your own funds. You don’t withhold it from the worker’s pay.
Household employers report and pay these taxes on Schedule H, filed with the personal Form 1040, and need an Employer Identification Number obtained through Form SS-4.5Internal Revenue Service. Instructions for Schedule H Missing these obligations can produce back taxes, penalties, and interest.
Nonprofits and Government Employers
Organizations described under Section 501(c)(3) of the Internal Revenue Code, along with state and local government entities, have a choice ordinary businesses do not. Instead of paying standard unemployment taxes into the state fund, they can elect to reimburse the state dollar-for-dollar for benefits actually paid to their former employees.6U.S. Department of Labor Employment and Training Administration. Unemployment Tax Act Relating to Liabilities of Reimbursing Employers The system calls this “reimbursable” financing rather than “contributory.”
Reimbursement can save money in quiet years but exposes the employer to large, unpredictable bills during downturns. States typically require reimbursing employers to post financial security, such as a surety bond or letter of credit, to guarantee they can cover future claims.
When Employers Pay More Because Their State Borrowed
When a state’s unemployment trust fund runs low, it can borrow from the federal government under Title XII of the Social Security Act.7Office of the Law Revision Counsel. 42 USC Chapter 7 Subchapter XII – Advances to State Unemployment Funds Those loans carry interest; the rate on outstanding advances in early 2026 was roughly 3.19%.8U.S. Treasury Fiscal Data. Advances to State Unemployment Funds (Social Security Act Title XII)
If a state carries an outstanding loan balance on January 1 for two consecutive years and hasn’t repaid it in full by November 10 of the second year, the 5.4% FUTA credit available to that state’s employers begins to shrink. The reduction is 0.3 percentage points the first year and another 0.3 points for each additional year the loan remains unpaid.9Internal Revenue Service. FUTA Credit Reduction Employers in the affected state pay more federal unemployment tax through no action of their own.
For the 2025 tax year, California and the U.S. Virgin Islands were subject to credit reductions because they hadn’t repaid their advances by the November deadline. California employers faced a 1.2 percentage-point reduction, raising their effective FUTA rate from 0.6% to 1.8%. U.S. Virgin Islands employers faced a 4.5 percentage-point reduction.10Federal Register. Notice of the Federal Unemployment Tax Act (FUTA) Credit Reductions Applicable for 2025 Connecticut and New York also had outstanding loans but repaid them in time and avoided the reduction.
Where the Money Goes
All unemployment taxes, federal and state, flow into the Unemployment Trust Fund held by the U.S. Treasury. The fund is divided into separate accounts for each state, so taxes collected from employers in one state are available only for that state’s claimants.11Office of the Law Revision Counsel. 42 USC 1104 – Unemployment Trust Fund Balances not currently needed are invested in U.S. Treasury securities.
Money in these accounts is legally restricted to paying unemployment benefits and cannot be redirected to other state budget needs. The segregation is what keeps the fund solvent enough to pay claims when a downturn hits. Federal FUTA revenue covers the administrative side — staffing, technology, and claims processing at state unemployment offices — and during widespread downturns can also fund Extended Benefits for workers who have exhausted their regular state claims.