Are Employers Required To Have Unemployment Insurance? | Now

In the U.S., many employers must pay unemployment taxes once they hit state and federal wage or hiring thresholds, with a few narrow exemptions.

If you’re hiring your first employee, “unemployment insurance” can feel like one more checkbox on a long list. It’s also one of the easiest items to get wrong, since the rules come from two places at once: your state’s unemployment program and the federal unemployment tax system.

Here’s the plain-language answer: in many cases, yes, employers end up required to carry unemployment coverage by paying unemployment taxes. The catch is that “required” depends on what you do, who you hire, where they work, and when you cross a threshold. Some businesses become liable right away. Others only after a payroll trigger. A small set may be excluded or handled under a different payment method.

This article walks through what “having unemployment insurance” really means, the triggers that usually create liability, the categories that often have special rules, and a practical way to stay compliant without turning it into a second job.

What Unemployment Insurance Means For Employers

In the U.S., unemployment insurance (UI) is usually not a private policy you buy from an insurer. It’s a payroll tax system that funds benefits for eligible workers who lose jobs through no fault of their own.

When people say an employer “has unemployment insurance,” they usually mean the employer is registered with the state UI agency, files wage reports, and pays state unemployment tax (often called SUTA). Many employers also pay federal unemployment tax (FUTA), filed annually with the IRS.

Two quick clarifiers keep people out of trouble:

• UI is generally employer-paid. FUTA is paid by the employer and is not withheld from workers’ paychecks. The IRS spells that out clearly on its FUTA overview page. Federal unemployment tax (FUTA) overview
• State rules set the day-to-day liability. Your state decides when you must register, when returns are due, what wage base applies, and how rates change over time.

Are Employers Required To Have Unemployment Insurance?

Many are, once they meet liability tests. Those tests vary by state, and they’re not only about headcount. A small company can owe UI even with one employee if payroll crosses a state threshold. A seasonal business can trigger UI after enough weeks of employment. Some employer types (like certain nonprofits, household employers, and farm employers) can face a different set of rules.

At the federal level, FUTA applies under specific tests, and the IRS explains that most employers pay both federal and state unemployment taxes, with separate tests for general employment, household workers, and agricultural workers. IRS Topic No. 759 (Form 940 and FUTA tests)

So the real question becomes: “Have I crossed a liability trigger in my state or under FUTA?” Once the answer is yes, you’re expected to register, report wages, and pay the related unemployment taxes on time.

Common Triggers That Create Unemployment Tax Liability

States don’t all use the same threshold, yet the patterns repeat. These are the triggers that show up again and again in state UI law:

Payroll Thresholds

Many states set a dollar amount of wages paid in a calendar quarter. Once you pay at least that amount in wages, you become a liable employer for UI purposes. The threshold can be low, so “tiny payroll” does not always mean “no unemployment tax.”

Employment-Week Thresholds

Some states use a “weeks of employment” test. A common structure is employing one or more people for parts of a day in a certain number of weeks in a year. If your staffing is seasonal or project-based, this can trip you up even when total wages feel modest.

Business Type Rules

Household employment and agricultural work often sit in their own category. Some states apply UI only after a higher wage threshold for household workers, or after specific farm-labor thresholds are met. That’s why copying a friend’s rule from another state can backfire.

Buying Or Taking Over A Business

Buying assets, taking over a location, or inheriting staff may bring “successor employer” rules into play. In many states, that can transfer an unemployment tax account, rate experience, or reporting obligations.

Multi-State Work And Remote Employees

Remote work adds a simple problem with messy outcomes: which state gets the UI tax? States apply “localization” style tests to decide where work is assigned. If you have workers in more than one state, you can end up filing in multiple places.

Employer Unemployment Insurance Rules By Business Type

Before you assume you’re exempt, match your situation to the category you actually fit. The labels matter, since UI liability is tied to how the worker relationship is classified and what kind of employer you are.

Standard Businesses With W-2 Employees

If you hire W-2 employees, you should assume UI taxes will apply once you meet your state’s liability trigger. Many states require registration soon after that trigger is met, and quarterly wage reports become part of normal payroll rhythm.

Household Employers

Nannies, caregivers, and housekeepers can trigger household employer rules. States often set a specific cash-wage threshold per quarter or per year. The federal side also has a separate FUTA test for household employment, which the IRS includes in its guidance on who must file Form 940. FUTA household employee test details

Agricultural Employers

Farm labor can be covered under a distinct test at both the state and federal level. The IRS describes an agricultural employees test for FUTA as well. That means a farm can be non-liable under the general test and still be liable under the agriculture test.

Nonprofits And Government Entities

Some nonprofits and government employers don’t pay UI the same way a for-profit does. In many states, eligible nonprofits can reimburse the state for benefits paid to former workers rather than paying a tax rate on wages. The rules are state-specific and tied to employer type and election timing.

Independent Contractors vs. Employees

Misclassifying workers is one of the fastest ways to rack up UI headaches. If the state decides a worker treated as a contractor is actually an employee, the employer can owe back unemployment taxes, penalties, and interest. The lesson: classify workers using your state’s tests, not by habit or a template contract.

For state-level liability examples in a clean, official format, Colorado publishes an employer liability chart that shows how different employer categories are treated. It’s a helpful model for the kind of details your own state publishes. Colorado UI Employer Liability Chart

How Federal FUTA Fits In

FUTA is the federal unemployment tax employers pay to support administration of the unemployment system and related federal components. The U.S. Department of Labor summarizes FUTA’s role in its UI tax topic materials. U.S. Department of Labor UI Tax Topic (FUTA overview)

The IRS also states plainly that FUTA is paid only by the employer and is not deducted from employees’ wages. IRS FUTA overview

In day-to-day practice, most small employers experience FUTA as an annual filing (Form 940) and state UI as quarterly wage reporting plus unemployment tax deposits. If you pay state unemployment taxes on time, you may qualify for a credit that reduces the effective FUTA rate. That credit structure is part of why timely state payments matter even when the dollar amount feels small.

What You Should Do The Moment You Hire

Waiting until year-end is where trouble starts. If you hire and run payroll, you should map your next steps the same week, even if you think you’re below thresholds. You’re building a clean paper trail and preventing a late-registration scramble.

Step 1: Confirm Where Work Is “Sited”

Start with the employee’s primary work state. If you have remote staff, confirm which state’s UI rules apply. If you truly have multi-state work, keep a simple record of where services are performed and where direction and control happens.

Step 2: Register When You Hit A State Trigger

Each state UI agency sets its registration timing. Many require registration soon after you become liable, not months later. Late registration can also mean a “penalty rate” in some states.

Step 3: Set Up A Repeatable Reporting System

You’ll usually file quarterly wage reports plus unemployment tax returns. Even if you outsource payroll, keep a calendar reminder for filing deadlines and account notices. Payroll services can miss a notice or fail to catch a special situation like a successor employer issue.

Step 4: Keep Hiring Records That UI Audits Ask For

State UI audits tend to ask for basic items: payroll registers, worker classification records, owner/officer status, and proof of where work was performed. Put these in a single folder and keep it current.

Employer Type Or Scenario	Typical UI Liability Trigger	Notes That Change The Outcome
Standard W-2 employer	State wage threshold per quarter or weeks-of-employment test	Triggers vary by state; registration is often required soon after liability starts
Household employer	State household wage threshold; separate FUTA household test	Often tied to cash wages; rules can differ from standard business thresholds
Agricultural employer	State farm-labor trigger; separate FUTA agricultural test	Farm labor categories and thresholds can be distinct from general employment
Nonprofit (eligible category)	State coverage rules for nonprofit employers	Some states allow reimbursement method instead of paying a tax rate on wages
Government entity	State coverage rules for public employers	Payment method and reporting can differ; still requires registration and reporting
Remote employee in another state	Work-location and localization tests	May require multi-state UI accounts if employees work in multiple states
Successor employer (buying a business)	Acquisition that transfers employees or operations	State may transfer experience rate; missing this can cause rate surprises
Worker treated as contractor	State finds worker is actually an employee	Back UI taxes, penalties, and interest can apply; classification records matter

Costs, Rates, And Why Timing Matters

Employers usually pay state UI on a taxable wage base per employee. Your rate often starts as a “new employer rate,” then shifts over time based on your experience, like claims history and timely reporting. A missed filing can lead to a higher assigned rate in some states.

Federal FUTA is an annual employer tax reported on Form 940, and the IRS lays out the filing obligation and tests under its Form 940 topic guidance. Form 940 (FUTA) filing criteria

If you pay state unemployment taxes late, you can lose part of the FUTA credit, which can raise your federal tax cost. So “late but paid” can still hurt. The cleanest approach is boring and effective: schedule filing and payment like rent. No drama. No surprises.

Common Mistakes That Trigger Notices And Audits

UI compliance issues usually come from the same few patterns. If you spot yourself in one of these, fix it early.

Registering Late After Crossing The Threshold

Some owners wait until the first unemployment claim arrives. By then, the state already has wage data from other systems, and late registration can bring penalties, back taxes, and rate issues.

Assuming “Part-Time” Means “Not Covered”

UI liability is not based on full-time status alone. Part-time workers can still count toward state liability tests, and their wages can be taxable for UI purposes.

Mixing Up Workers’ Comp With Unemployment

Workers’ compensation and UI are different systems. Paying one does not satisfy the other. You can be fully compliant on workers’ comp and still owe UI taxes.

Misclassifying A Worker

If your state later treats a contractor as an employee, UI taxes can be assessed retroactively. Keep written records that support classification, including the nature of the work relationship and who controls how the work is done.

Ignoring Multi-State Details

If you have employees working in more than one state, UI can become a multi-account situation. Track where work is performed and where the employee is based. Then register in the correct state(s) when liability starts.

Task	When To Do It	What “Done” Looks Like
Confirm UI state for each employee	Before first payroll run	Work state documented; remote work state noted; multi-state flags identified
Check state liability threshold	Week you hire	Threshold copied from state UI agency site; reminder set to re-check quarterly
Register for state UI account	As soon as you meet liability trigger	Account number issued; online portal access confirmed; rate notice saved
Set quarterly filing calendar	Same month you register	Recurring reminders for wage reports and UI tax returns; backup reminder set
Confirm FUTA status and Form 940 plan	After first quarter of payroll	FUTA test reviewed; annual filing owner assigned; records folder created
Keep worker classification file	At hire and when roles change	Role description, contract terms, and control factors documented

Practical Scenarios People Ask About

I Only Have One Employee. Do I Still Need UI?

Possibly, yes. Many states can trigger liability with one employee after a wage threshold or a weeks-of-employment test. Check your state’s UI agency rules early, then set a reminder to confirm after each quarter until you’re sure you’re liable or not.

I Pay People As Contractors. Does UI Still Apply?

UI generally applies to employees. If a worker is correctly classified as an independent contractor under your state’s test, UI taxes typically do not apply to payments for that work. The risk is misclassification. If the state reclassifies the worker as an employee, UI taxes can be assessed for past wages.

My Business Is A Nonprofit. Am I Exempt?

Not automatically. Some nonprofits are covered under state UI rules and may be able to choose a reimbursement method instead of paying UI tax as a rate on wages. The election rules and deadlines are set by the state, so this needs a state-specific check.

I’m In One State But My Employee Is In Another

This is common now. UI tax is usually tied to where the work is performed and localized. If you hire across state lines, treat UI registration like a standard setup step, just like payroll withholding registration.

A Simple Way To Stay Compliant Without Overthinking It

If you want one clean system that scales from one employee to fifty, use this routine:

1. Start a UI folder for each state where you have workers: registration proof, rate notices, quarterly filings, and payment confirmations.
2. Write down your liability trigger from the state UI agency page and your FUTA test result from the IRS guidance.
3. Put quarterly UI deadlines on a calendar with two reminders: one a week before, one two days before.
4. Review notices right away since UI rates and taxable wage bases can change year to year.

For federal context and how FUTA supports the system, the Department of Labor’s UI tax topic page is a solid reference point. DOL UI Tax Topic

For the IRS view of employer FUTA responsibility, the FUTA overview is direct and easy to skim. IRS FUTA overview

When A “No” Answer Can Be Real

Some employers truly are not liable for UI, at least for a time. Common reasons include not meeting the state threshold yet, using only correctly classified contractors, or operating in a category that has a separate trigger you have not met.

Even then, you still want proof. A short note in your records saying “not liable yet because we have no employees” or “not liable yet because wages are below the state threshold” makes future clean-up simpler, especially if you grow fast.

If you’re unsure, the safest move is to read your state UI agency’s employer liability page and compare it to your payroll reality. Then revisit it each quarter until you’re clearly inside or outside liability.