What Is Unemployment Income?

The term unemployment income refers to an insurance benefit paid as a result of a taxpayer's inability to find gainful employment. Unemployment income is paid from either a federal or state-sponsored fund. The recipient must meet certain criteria in trying to find a job. Employers and employees are assessed a payroll tax to cover the cost of this benefit.

Unemployment income is also known as an unemployment benefit, unemployment compensation, or unemployment insurance. The term is most commonly associated with filing a tax return, where such income must be reported. 

Key Takeaways

  • Unemployment income is paid by the government temporarily to unemployed workers who have lost their jobs due to layoffs or other reasons not of their own fault.
  • The goal of unemployment income is to provide a social safety net to those individuals who have become unemployed while they are looking for a new job.
  • Typically, unemployment is treated as ordinary income for tax purposes and must be reported to the IRS.
  • Under normal circumstances, most states pay a maximum of 26 weeks of unemployment benefits, but benefits can be extended or augmented during times of economic crisis.

Understanding Unemployment Income

Unemployment benefits were first introduced in 1935 along with Social Security. Unemployment income is designed to provide subsistence income for a given length of time, giving the unemployed recipient time to find another job.

In the United States, unemployment income is paid to jobless individuals who qualify for them. Individuals must have worked at least one quarter in the previous year and must have been laid off by their employer. They must be actively seeking work to claim and receive benefits. Temporary workers or those who worked off the books are not eligible, nor are individuals who quit their jobs or were fired for misconduct.

Claims may be denied for a number of reasons, including if:

  • The worker quit their job without a reasonable cause, such as medical reasons or to care for a family member.
  • The worker is not available for work (meaning there is nothing preventing the individual from accepting a new job).
  • The worker was terminated for misconduct.
  • The worker refused suitable work.
  • The unemployment was the result of a labor dispute.

Unemployment income is fully taxable as ordinary income. Recipients are sent a Form 1099-G at year-end detailing how much they received, which they must report on their 1040 form.

Unemployment Income Amounts

Individual states determine how much unemployment income an individual receives on a weekly basis, a figure that may vary significantly from state to state.

For example, Minnesota had one of the highest maximum weekly benefit amounts at $683, topped only by Massachusetts at $855. Massachusetts allows up to 30 weeks of payments; Minnesota offers 26. Though not the lowest, Florida's $375 maximum weekly benefit and 14 weeks of benefits is among the least generous.

During times of high unemployment, such as during the Great Recession, unemployment income payments may last for over 100 weeks. During times of low unemployment, such benefits tend to last for up to roughly six months or 26 weeks in most states, though some states may offer a fraction of that.

The COVID-19 Pandemic and Unemployment Income

On March 27, 2020, President Donald Trump signed into law a $2 trillion coronavirus emergency stimulus package called the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which put provisions in place to provide unemployment benefits to unemployed individuals affected by the pandemic.

The law also expanded eligibility to allow those who otherwise don't qualify for benefits, including self-employed people, freelancers, and independent contractors, and created three initiatives called the Pandemic Unemployment Assistance (PUA) program, the Federal Pandemic Unemployment (FPUC) program, and the Pandemic Emergency Unemployment Compensation (PEUC) program.

Pandemic Unemployment Assistance (PUA)

As mentioned above, unemployment benefits were expanded under the PUA to include people who normally don't qualify for this type of income. These benefits are based on someone's previous earnings, according to a formula by the Disaster Unemployment Assistance program.

The minimum benefit provided is 50% of an individual state's average benefit per week, which is approximately $190 for that period.

Federal Pandemic Unemployment Compensation (FPUC)

The CARES Act also established the FPUC program, which provided unemployed individuals with an extra benefit of $600. This benefit was paid weekly in addition to other unemployment income until July 2020.

The Trump administration extended this benefit after passing the Consolidated Appropriations Act (CAA) of 2021 in December 2020. But the amount was reduced down to $300, payable every week beginning Dec. 26, 2020, until March 14, 2021.

President Joe Biden pushed down the expiration date after he signed the $1.9 trillion package called the American Rescue Plan Act of 2021 on March 11, 2021. According to the new law, unemployed individuals can receive the additional $300 weekly benefit until Sept. 6, 2021.

While the American Rescue Pan extended the deadline for federal pandemic unemployment relief to Sept. 6, a number of states have elected to end their enrollment in the FPUC and PEUC programs early. The best way to confirm the status and duration of your unemployment benefits is to check with your state's unemployment office.

Pandemic Emergency Unemployment Compensation (PEUC) 

States normally provide people with 26 weeks of unemployment benefits. But the CARES Act expanded that timeline under the PEUC, allowing individuals to claim benefits for an additional 13 weeks. But the law stated that people must be "able to work, available to work, and actively seeking work."

This was extended to 24 weeks with the passage of the CAA in December 2020. The Biden Administration changed that again in March 2021 to 53 weeks, meaning the PEUC is set to expire on Sept. 6, 2021.