Federal Unemployment Taxes

• The Internal Revenue Service collects unemployment insurance taxes from employers. Unlike federal income taxes, unemployment taxes are not deducted from employee wages. They are paid primarily by the employer with their corporate or business tax returns. Employers may additionally qualify for a tax credit to help offset additional costs from state-level unemployment taxes. The federal unemployment tax is filed with IRS Form 940, and as of February 2011, is applied to the first $7,000 of employee wages.
  
  

State Unemployment Taxes

• In addition to federal unemployment taxes, employers typically also pay state employment taxes. Unemployment benefits for workers who have lost their jobs are paid for by both of these taxation systems, though the federal taxes are used primarily to pay for longer-term or emergency benefits. This allows individual states to set their own tax rates and set their own levels of benefits according to local priorities. If an employer makes sure to pay their its unemployment taxes on time and in full, it can qualify for a credit against their federal unemployment tax.
  
  

Taxes on Employees

• A few states require employees to contribute a portion of their paychecks to state unemployment funds. As of February 2011, only Alaska, New Jersey and Pennsylvania require employees to pay for unemployment taxes, and their respective rates vary. In these states, unemployment taxes are deducted from employee pay, just like federal or state income taxes, and then are paid by the employer to the state government.
  
  

Benefits

• Unemployment benefits are a type of insurance policy against job loss. Employees are entitled to unemployment benefits when they lose their jobs, depending on the amount of time they were employed and the conditions of their termination. Workers also may receive benefits merely for having their hours reduced or furloughed, a situation called "partial unemployment" by the Department of Labor. In addition to jobless benefits, unemployment taxes help pay for job search services and training centers.