The U.S. Department of Labor’s Unemployment Insurance program is funded through unemployment insurance taxes paid by employers and collected by the state and federal government. The taxes are part of the often-discussed payroll taxes all employers pay. Employers pay federal taxes of 6 percent on the first $7,000 in annual income earned by every employee. Employers who pay on time get a tax break at 5.4 percent.
The amount collected by each state varies as does the amount of income it is collected on—the first $7,000 to $34,000 an employee earns each year, depending on the state. States create their tax systems based on the costs needed to cover their unemployment claims. Contrary to popular belief, employees are very rarely required to pay into unemployment insurance. There are only three states—Arkansas, New Jersey and Pennsylvania—that ask employees to contribute and only in specific situations.