How does unemployment work?


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Millions of Americans who never imagined they’d be out of work—especially in what was until recently an incredibly hot job market—suddenly have been forced by the coronavirus pandemic to learn the ins and outs of the unemployment system.

And there’s a lot to get through. What is unemployment compensation? Who is eligible? What is the application process for benefits? How much compensation is offered to unemployed workers and how long will the benefits last? These are just a few of the questions workers who’ve lost a job or had their hours reduced need answered.

Unemployment insurance rules vary from state to state, and they’ve expanded under the CARES Act.

Those answers aren’t always easy to get. That’s mostly because the rules differ a bit from state to state, and most of those state systems have been overwhelmed with claims since the pandemic began, forcing businesses to close. So it can be difficult to get one-on-one, real-time advice.


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Also, under the new federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, unemployment benefits have been expanded in several ways, including changes to who’s eligible, how much compensation unemployed workers can claim, and how long they can receive payments. Because the situation is so fluid, it can be even more confusing.

Related: What is a Financial Coach?

What Is unemployment insurance?

Unemployment benefits assist those who are involuntarily unemployed and meet specific eligibility requirements.

Those benefits come from unemployment insurance  programs that are run as partnerships between federal and state governments. Each state and territory is allowed to set the criteria for its unemployment program, but they all do so using federal guidelines, and the US Department of Labor oversees the Federal-State Unemployment Insurance Program.

Unemployment insurance is financed by taxes paid by employers and remitted to the federal trust fund, where it’s divided into three buckets:

•  Individual states’ accounts for covering normal unemployment insurance benefits.
•  A fund to make loans to states that deplete their own reserves.
•  A program that covers half of the extended unemployment benefits made available when states go through long periods of high unemployment. (The states are expected to cover the other half of those extended benefits.)

Determining eligibility for unemployment benefits

Probably the most essential thing to understand about unemployment benefits is that the money is set aside for those who’ve lost a job or had their hours cut through no fault of their own. Those who quit a job or are fired for cause may not be eligible for compensation.

The unemployed person also must meet state standards for the amount of wages earned or the amount of time worked during a certain period—known as the “base period  ”—which for most states is the earliest four of the last five complete quarters of the calendar year.

So, for example, if a person applied for unemployment in March because of a coronavirus-related job loss, the base period would be Oct. 1, 2018, through Sept. 30, 2019.

Under traditional circumstances, most states also require those receiving compensation to keep looking for employment—and a state may ask for regular updates on the job search.

Part-time workers may be eligible for benefits, depending on their state’s eligibility requirements. If a worker earned enough money, it may not matter that they were considered part time.

Part-time workers and those who have had their hours cut may not receive full benefits, but they could get partial payments, so it’s worth checking the state’s rules, which may have been loosened during the coronavirus crisis.

Workers who received a severance package (a lump sum or installments) should check out their state’s rules for receiving unemployment.

Unemployment insurance amounts vary

Generally, benefits are based on a percentage of a worker’s weekly earnings, but the amount—and how it’s determined—varies from state to state. According to a CNBC analysis of US Labor Department data for 2019, the average benefit received  in the US was $378 a week.

The lowest 2019 average amount paid was in Mississippi, at $213 and the highest average amount paid was in Massachusetts, at $555.

Many states offer calculators for those who want to know what their benefits will be. State-by-state benefits information and calculators are also available at  , which is sponsored by the US Department of Labor Employment and Training Administration, or at  .

Under the CARES Act, through July 31, 2020, eligible unemployment claimants in every state, including those qualifying under the Pandemic Unemployment Assistance program, will receive an additional $600 per week in Federal Pandemic Unemployment Compensation, for up to four months, on top of their state benefit.

How long do benefits last?

In most states, benefits usually end after 26 weeks  , but there are exceptions. Some states provide a little more time, others a little less, and some base their cap on their current unemployment rates.

Be prepared before starting the application process

Most states and territories ask applicants to file  for benefits online or by phone, and the state websites will take applicants through the various necessary steps to claim their benefits.

To save time and frustration, applicants may want to gather information and documents they’ll need before logging on, including:

•  Pen and paper to jot down notes, including password and confirmation information.
•  Social Security number.
•  Driver’s license or state ID card number.
•  If applicable, an Alien Registration  Number.
•  Cell and/or landline contact numbers and full mailing address.
•  Employer Registration number or Federal Employer Identification Number for the most recent employer (available on the W-2 form).
•  Names and addresses for all employers for the past two years.
•  For active or ex-service members claiming based on military service, a copy of the most recent separation form DD214.
•  Bank account routing  and account numbers (for states that offer direct deposit).

Some states’ websites have been inundated with claims, so applicants may have to be patient about getting online. And it’s probably a good idea to set aside at least an hour—with limited distractions—to file.

Waiting for the first payment

Once an applicant files a claim, the state’s unemployment agency will review it and gather more information if necessary. That means the agency may interview the applicant to ask questions and/or contact that person’s last employer to ask about earnings and when employment ended.

If there aren’t any complications, an applicant may receive a check within a few weeks. The overwhelming number of claims that currently need to be processed could slow things down a bit, though.

Some states also impose an unpaid waiting period before a person can receive benefits.

Some states also impose an unpaid waiting period, usually no longer than a week, before a person can receive benefits.

After filing, a claimant can access his or her account to check on the status of a claim, whether a payment has been made, and how many weeks of compensation are left once payments start.

Once applicants are approved, they still have to file for benefits weekly or biweekly. (That’s when, depending on the state, they may be expected to prove they’ve been actively seeking employment or that they’re still eligible for benefits.)

Unemployment compensation and taxes

The federal government taxes  unemployment benefits as though they’re ordinary wages. Some states also tax payments or a portion of those payments. Unemployment recipients can choose to have federal income tax withheld  —at a flat rate of 10%—by filing a Voluntary Withholding Request (Form W-4V).

Taxpayers who don’t have federal taxes withheld may have to make estimated quarterly tax payments if they expect to owe $1,000 or more in taxes for the year. The IRS can charge a penalty for failing to pay these quarterly taxes.

Additional steps to take

Some jobs may come back in weeks or months—others might be lost forever. And even those workers who keep their jobs or find new ones may be left reeling as the economy struggles. There are a few steps that all Americans—employed or not—may consider taking to help themselves through this current economic crisis.

Making a Budget

Budgeting is one way to stay on course during a financial upheaval. It can help with setting priorities and making sure important bills aren’t missed.

Getting Career Help

Career coaching and networking can help with a job search, and also with reassessing goals and perhaps even setting a new career path.

Getting Financial Advice

It may be difficult to think about saving and investing during hard times, but many individuals and families might find this is the nudge they needed to seek professional advice.

Investors are known to make mistakes when their emotions get the best of them, and the markets could be tumultuous for quite a while. A financial planner may be able to help with decisions about what to do next as the nation’s health and economy move toward recovery.

Losing a job can be a heart-breaking, confidence-killing, bank account-busting experience. But there’s help out there for those who need it.

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