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Labor and Economic Opportunity

Unemployment Insurance Taxes

Generally, in the first two years of a business's liability, the tax rate is set by law at 2.7%, except for employers in the construction industry, whose rate in the first two years is that of the average employer in the construction industry, which is announced by UIA early each year. In recent years, this construction rate has ranged from 6.8% to 8.1%.

The rates in the third and fourth years of liability are partly based on the employer's own history of benefit charges and taxable payroll. This history is known as an employer's unemployment insurance experience.

Beginning in the fifth year of liability, the tax rate is made up of three components which are computed separately and then added together to figure the yearly tax rate.

 The three components are the Chargeable Benefits Component (CBC); the Account Building Component (ABC); and the Nonchargeable Benefits Component (NBC).

 The Chargeable Benefits Component and the Account Building Component are affected by the employer's payroll, and the unemployment benefit charges to their account. Since these components reflect each company's experience, they are known as the experience components, and the entire taxing computation is known as experience rating. Generally, employers that have many former workers drawing unemployment benefits have higher tax rates, while employers that have few former workers drawing benefits have lower tax rates.

Michigan's unemployment tax system is one of the most highly "experience rated" systems in the country. This generally means that a Michigan employer's tax is more closely based on the actual benefit charges to its account, and the size of payroll, than employers in most other states.

What happens to state and federal unemployment tax payments?

The state unemployment taxes employers pay to the UIA are used only for the payment of unemployment benefits to Michigan workers. All regular state benefits are paid from these taxes, as are half of any Extended Benefits paid to former employees. 

These regular and extended benefit payments are usually charged to the employer's account. However, in most cases, if a claimant was disqualified for benefits when he or she left work, and then requalifies and is paid benefits, the benefits will not be charged to the employer's account.

The federal unemployment taxes paid to the Internal Revenue Service (Form IRS 940), are used to pay the costs of administration of the unemployment insurance and Job Service programs in all states. It also pays the federal share of Extended Benefits, and is used to build a fund from which states may borrow, if necessary, to pay benefits.