1 of 9Start
Unemployment insurance (UI) is a government program that temporarily replaces part of workers’ wages after they lose a job. The CARES Act of 2020 included a brief, but important, expansion of those benefits.
2 of 9
What is unemployment insurance?
Unemployment insurance offers weekly checks to recently unemployed people for up to 26 weeks. It’s an “earned benefit,” which means it’s only available to people who have paid into the system through their taxes. The program is run independently by every state, so the experience people have with it can vary dramatically based on where they live (including the amount of money they can get, how long they can get it for, and even the experience of applying for benefits).
The amount of money a person gets depends on their previous income. On average, UI benefits make up for about half of the worker’s wages (up to a maximum amount). The exact percentage and number of weeks a person can receive benefits vary by state, but range from an average weekly benefit of $101 to $531 and a maximum duration of 12 to 30 weeks.
Unemployment insurance also includes a program called Short-Time Compensation, otherwise known as work sharing. Work sharing programs encourage employers to reduce hours instead of laying off staff, and employees are compensated for the wages from those lost hours through unemployment benefits. Workers get to keep their jobs, benefits, and incomes, while employers keep their skilled workforce and don’t incur the costs of rehiring when the economy picks back up again. Currently, 27 states and D.C. allow employers to enter into work sharing agreements with the government.
3 of 9
Who qualified for unemployment insurance before the pandemic?
In order to receive unemployment benefits, a person must have lost their job through no fault of their own; be able, available, and actively seeking work; and meet minimum earnings and/or working hours requirements (depending on which state they’re in) prior to becoming unemployed. A lot of people are not typically eligible for UI, including self-employed people, contractors, gig workers, students and recent graduates, workers who left their jobs voluntarily or were fired with cause, undocumented immigrants, and many part-time workers.
4 of 9
How is unemployment insurance funded and taxed?
Employers are charged a small payroll tax on each employee’s first several thousand dollars of earnings. Alaska, New Jersey, and Pennsylvania levy a tax on employees as well.
Employers pay different amounts depending on how many of their past workers have filed for Unemployment Insurance in the past three years. Employers who have laid off more workers have to contribute more, because they cost the system more.
Unemployment benefits are taxable income. They are not subject to Medicare or Social Security taxes, but recipients do have to pay federal, and oftentimes state, income taxes on their unemployment checks. Of the 43 states with an income tax, just six — California, Montana, New Jersey, Oregon, Pennsylvania, and Virginia — currently exempt unemployment benefits from state income taxes.
However, unlike standard paychecks, recipients have to opt in to withholding income taxes from their benefits by filling out a W-4V form to withhold a flat 10 percent from each check. If they don’t, they will likely have to send quarterly estimated payments to the IRS, or else face a large tax bill, and possibly even a financial penalty, the following spring.
5 of 9
What are extended benefits
When a state is experiencing high rates of unemployment, its residents can qualify for additional weeks of unemployment insurance, half funded by the federal government, after their initial benefits have expired.
There are three ways a state can trigger extended benefits.
- All states must pay out extended benefits if their insured unemployment rateThe insured unemployment rate is the percentage of people collecting unemployment benefits out of all people who would qualify for unemployment insurance if they lost their job. for the previous 13 weeks is at least 5 percent, and it is at least 20 percent higher than the same period in the two previous years.
- Twenty-nine states and Washington, D.C., have chosen to trigger extended benefits if their insured unemployment rate is at least 6 percent for the previous 13 weeks.
- Eleven states have opted to also trigger extended benefits when their seasonally-adjusted total unemployment rate for the previous three months is at least 6.5 percent, and is 10 percent higher than the two previous years. Those states trigger an additional seven weeks of benefits on top of the extended benefits when their seasonally-adjusted total unemployment rate for the previous three months is at least 8 percent, and is 10 percent higher than the two previous years.
The exact number of extra weeks of extended benefits is half of the length of regular unemployment benefits, up to 13 weeks. In most states, regular unemployment benefits last 26 weeks, but they can be as short as 12 weeks in Florida and North Carolina or as long as 28 weeks in Montana and 30 weeks in Massachusetts.
6 of 9
How did the CARES Act change unemployment insurance?
The CARES Act created three new forms of unemployment benefits for states to distribute, fully funded by the federal government (even though Unemployment Insurance applications are still handled state-by-state).
- Pandemic Unemployment Compensation (PUC) provided an additional $600 per week on top of any state unemployment benefits until the week ending July 25 or 26, 2020 (depending on the state) to anyone eligible for UI.
- Pandemic Emergency Unemployment Compensation (PEUC) offers 13 additional weeks of the state unemployment benefits after a person has reached their state’s time limit (26 weeks in most states). This is in addition to extended benefits. PEUC is paid out after a person has used up all of their regular unemployment benefit weeks, but before they receive their extended benefits.
- Pandemic Unemployment Assistance (PUA) expands UI to most of the people who aren’t normally covered. Anyone who has lost a significant amount of their income or expected income, such as workers who had accepted a job offer but then had it rescinded, for any reason related to COVID-19, can receive unemployment benefits of at least half the state’s average (except, unfortunately, undocumented immigrants). Workers are eligible for up to 39 weeks of PUA until December 31, 2020, and they can receive the benefits retroactively for any COVID-19 related job loss that took place after January 27, 2020. The additional $600 weekly from PUC can go to both normal UI recipients and PUA recipients.
The CARES Act also made several administrative changes, including encouraging states to waive “waiting weeks” and allowing states to temporarily modify or suspend work search requirements. It has also temporarily provided federal funding to states that utilize Short-Time Compensation (work sharing) programs.
7 of 9
Will the increased benefits discourage people from working?
Nope! This has been a common talking point, but there are some serious logical flaws with it. (Not least of which is that there’s evidence that people who receive UI are more likely to look for work.)
First, a person cannot collect unemployment if they quit their job. Regardless of how it pays compared to their usual wages, to receive unemployment benefits a worker must produce a valid reason — i.e. layoffs, furloughs, significant hour cuts, or business closure — for why they were forced to stop working.
Second, during the COVID-19 crisis, a worker can refuse to go to work and still collect unemployment through PUA, but only if they can prove their need to stay home is due to COVID-19 and is on the CARES Act’s list of eligible reasons. At a time when we need fewer people congregating in public spaces like offices, it’s better to make sure people can afford to stay home until the pandemic is over rather than forcing people back to work too soon and spreading the virus more.
Third, these benefits end as soon as a workplace is deemed safe to reopen or essential (even if the workers disagree with that designation). At that time, if a worker’s bosses decide to call them back into work (even if they were laid off), workers who refuse to return will lose their unemployment benefits, unless they qualify under the CARES Act’s list of eligible reasons. That’s true even if workers have real reason to fear contracting COVD-19 from the job, like in meat processing plants.
More generally speaking, most of the people receiving unemployment benefits during a recession are doing so because there are no jobs available. People who are receiving unemployment benefits also typically receive better job offers compared to those who have used up their benefits, who are quicker to settle for a lower-paying job than the one they lost.
8 of 9
What are the broader benefits of unemployment insurance?
Unemployment insurance is one of the most efficient anti-recession programs, because benefits are almost entirely spent on immediate basic needs. Because the money received from UI is spent so spent so quickly rather than being saved, it actually boosts the economy. Each dollar of UI benefits produces well over a dollar of economic activity for the nation as a whole. And that extra economic activity ultimately creates thousands of jobs through increased demand. By one estimate, continuing the $600 weekly enhanced unemployment benefits for an extra year would boost employment by over 5 million jobs and increase the average quarterly GDP by 3.7 percent.
Just as importantly, UI directly helps prevent foreclosures, evictions, and people falling into poverty, with the suffering avoided numbering in the millions during the great recession. It’s estimated that the expansion of unemployment benefits included in the CARES Act, in conjunction with the one-time Economic Impact Payments, have prevented a huge rise in poverty rates, despite not all those who are eligible actually receiving them.
9 of 9
Where can I learn more?
The Brookings Institution has a comprehensive explanation of how unemployment insurance works and how it has changed during the coronavirus pandemic.
The Center on Budget and Policy Priorities has a guide to the unemployment rate in every state and how many weeks of unemployment benefits are available in each of them.
The Center on Budget and Policy Priorities explains how unemployment benefits react to a worsening economy and provides a graphic detailing the changes made to the program by the CARES Act.
Vox explains how to sign up for unemployment benefits during the coronavirus crisis and answers questions about eligibility, process requirements, and benefit amounts.
The Center on Budget and Policy Priorities gives a detailed explanation of the purpose of unemployment insurance, how it works, how it’s funded, and its effects on the broader economy.
The National Employment Law Project breaks down the three new unemployment insurance programs created by the CARES Act: Pandemic Emergency Unemployment Compensation, Pandemic Unemployment Compensation, and Pandemic Unemployment Assistance.
The Brookings Institution debunks misconceptions about the effects of the CARES Act’s changes to unemployment insurance.
What you need to know about unemployment benefits and income taxes.