Each state, including Michigan, has an unemployment insurance fund established for displaced workers. Employees who become unemployed through no fault of their own may be eligible to receive benefits from the plan. Most Michigan employers are required to contribute to the plan. While the taxable wage limit for Michigan employers who pay into the fund is the same for each employee, the tax rate each employer pays differs. In addition to the amount of each employee’s wages that are taxable for state unemployment, a portion of each employee’s wages are also taxable for federal unemployment taxes.
Standard State Unemployment Taxes
Michigan collects state unemployment taxes from most employers who pay wages. Wages are defined as payments subject to income tax withholding and W-2 filings at the end of each year. If a company is required to pay regularly into the state unemployment fund, it must pay state unemployment tax on the first $9,000 an employee earns during the year. The percentage an employer pays on this amount varies, and it is dependent on how long the business has been open, the nature of the business’s industry and the number of unemployment claims filed against the company. As of publication, the state unemployment tax rate ranges between .06 and 10.3 percent. Workers do not pay Michigan unemployment taxes, and employers are not required to pay unemployment taxes for contract or 1099 workers.
Michigan has two unemployment insurance categories for employers -- contributing and reimbursing. Contributing employers are required to pay into the state unemployment insurance fund regularly. This category requires businesses to pay on the first $9,000 of each employee’s wages, according to the experience rate assigned by the state Unemployment Insurance Agency. Private employers are all assigned to this category.
A Michigan reimbursing employer is not required to make regular contributions to the state unemployment insurance fund. Employers in this category only pay the fund back if unemployment claims are filed against the organization. Reimbursements are made dollar-for-dollar, which means that employers in this category do not have contribution caps based on the amount of wages a worker earns during the year. Only government and non-profit employers are eligible to be classified as reimbursing employers for Michigan unemployment tax.
Federal Unemployment Taxes
In addition to state unemployment taxes, Michigan employers must also pay federal unemployment taxes. Federal unemployment insurance funds are distributed to states that have depleted local unemployment insurance reserves, and they are also used to pay for the administration of state unemployment agencies and work programs. The IRS requires that federal unemployment insurance taxes be paid on the first $7,000 of an employee’s wages each year. However, a credit is offered to reduce the total amount of federal unemployment tax that an employer pays from 6.2 percent to .08 percent.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.