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Unemployment insurance (UI) is a government program that temporarily replaces part of workers’ wages after they lose a job. Several different pieces of legislation throughout the COVID-19 pandemic created temporary expansions of these benefits.
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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). Benefits vary by state, but range from an average weekly amount of $215 to $550 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, 26 states and D.C. allow employers to enter into work sharing agreements with the government.
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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.
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How is unemployment insurance funded and taxed?
Funding for Unemployment Insurance comes from a small payroll tax that employers pay for 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.
People who receive unemployment benefits also pay taxes on them. The benefits 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, those taxes aren’t automatically withheld. Recipients have to opt in to withholding income taxes from their benefits by filling out a W-4V form or send quarterly estimated payments to the IRS. If they don’t, people who receive unemployment benefits face a large tax bill, and possibly even a financial penalty, when they file their annual taxes.
During the pandemic, some states, like California, never offered the option to withhold 10 percent for taxes, and less than 40 percent of all UI payments in the country in 2020 appear to have had taxes withheld, meaning 60 percent of UI recipients in 2020 could be hit with a surprise tax bill. Several, but not all, states either do not have an income tax, already did not tax UI benefits, or have exempted UI benefits from 2020 from their state income tax. Under the American Rescue Plan, the first $10,200 of UI benefits from 2020 are exempted from the federal income tax.
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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 (although it drops to 26 weeks in Massachusetts if extended benefits are in place).
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How has the pandemic impacted Unemployment Insurance?
Congress has created federal programs to extend UI benefits in every major recession since 1958, often allowing unemployed workers to continue receiving benefits until well after the recession had ended, because it takes time for the labor market to rebound and job opportunities to become available.
The COVID-19 pandemic triggered a recession that required one of these benefit extensions: By the end of April 2020, more than 22 million jobs (almost 15 percent of the workforce) had been lost due to the coronavirus recession. A disproportionate number of the newly unemployed were low-wage workers, particularly women and people of color, who often did not have savings to fall back on. As a result, the country suddenly faced eviction and hunger crises at a massive scale amidst a deadly pandemic.
Congress responded to the crisis by creating three new programs to expand UI in March 2020, and then extended those programs multiple times in subsequent legislation.
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Unemployment benefit changes in the CARES Act (March 2020)
In March 2020, the third emergency pandemic response law, called the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), created three new forms of unemployment benefits for states to distribute, fully funded by the federal government:
- Pandemic Unemployment Compensation (PUC) provided an additional $600 per week on top of any state unemployment benefits until the end of July 2020 to anyone eligible for UI.
- Pandemic Emergency Unemployment Compensation (PEUC) offered 13 additional weeks of the state unemployment benefits after a person had reached their state’s time limit (26 weeks in most states). Only once a person has exhausted PEUC will they move onto Extended Benefits, if those have been triggered in their state.
- Pandemic Unemployment Assistance (PUA) expanded 39 weeks of benefits to most of the people who aren’t normally covered (including self-employed independent contractors—like gig workers—and those with irregular or insufficient work histories. Unfortunately undocumented immigrants were still excluded). The last of these benefits was set to expire on December 31, 2020.
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Unemployment benefit changes in the Continued Assistance for Unemployed Workers Act (December 2020)
In late December 2020, as the provisions of the CARES Act were expiring, the federal government included some key UI provisions in a larger government funding bill.
It extended all three of the UI programs created by the CARES Act until at least March 14, 2021 and added 11 more weeks of eligibility for PUA (the program that extended eligibility to workers who previously weren’t eligible for UI) and PEUC (the program that made benefits available for a longer period of time).
Congress brought back PUC (the program that added more money to the base level of benefits) through March, but at $300 per week instead of the previous $600. It also created a program (called Mixed Earner Unemployment Compensation, or MEUC) that would give “mixed earners” an additional $100 to make up for state unemployment benefits that were lower than they should have been because their earnings were split between self-employment and W-2 income.
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Unemployment benefit changes in the American Rescue Plan (March 2021)
In March 2021, President Biden signed the American Rescue Plan Act (ARPA), which further extended pandemic unemployment provisions.
The pandemic unemployment programs were extended through the week ending September 6, 2021, adding 29 weeks of eligibility. PUC (the program that added more money to the base level of benefits) will stay at $300 per week for every week starting after March 14.
The first $10,200 of UI benefits from 2020 were made non-taxable for households with adjustable gross incomes under $150,000. Families who had already filed their taxes before ARPA was passed will receive retroactive relief from this provision automatically and do not need to file and amended return.
In a departure from previous policy, people who receive accidental overpayments through no fault of their own will not have to pay the extra amount back.
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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.)
A person cannot collect unemployment if they quit their job (unless it’s because of health concerns from COVID-19). 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.
Furthermore, people who are receiving unemployment benefits typically receive better job offers compared to those who have used up their benefits, because they do not have to settle for lower-paying jobs to meet their immediate needs.
More generally speaking, most of the people receiving unemployment benefits during a recession are doing so because there are no jobs available. Evidence from this recession has shown that even the $600 weekly top-up to UI benefits didn’t discourage people from taking work, even if it paid less than their weekly UI benefits. People understand that unemployment benefits offer protection in the short-term, but a job provides more security in the long-run.
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What are the broader benefits of unemployment insurance?
Unemployment Insurance (UI) 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.
Just as importantly, UI directly helps prevent foreclosures, evictions, and people falling into poverty. The UI provisions in the December 2020 relief bill, which added $300 per week to benefits and expanded eligibility by extending the PUA and PEUC programs, were projected to keep more than 7 million people out of poverty, and that’s despite not all those who are eligible for UI actually receiving benefits. Actually receiving UI was also associated with better mental health and less delay of seeking health care. Additionally, during a pandemic, it is desirable and necessary for people to stay home to prevent spread of the disease. Without UI, millions more would be forced to go out and work in order to be able to afford basic necessities like foo
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Where can I learn more?
The Century Foundation put together a Q&A with Unemployment Insurance experts on the unemployment provisions in the American Rescue Plan.
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, along with a detailed explanation of the purpose of unemployment insurance, how it works, how it’s funded, and its effects on the broader economy.
Vox explains how to sign up for unemployment benefits during the coronavirus crisis and answers questions about eligibility, process requirements, and benefit amounts.
The National Employment Law Project breaks down the three new unemployment insurance programs created by the CARES Act: PUC, PEUC, and PUA. NELP also explained the unemployment provisions in the December 2020 relief bill and wrote a handy FAQ on unemployment insurance for workers.
CNBC succinctly explains the new MEUC program for mixed earners.
What you need to know about unemployment benefits and income taxes.