What Is Unemployment Income?

Unemployment income is an insurance benefit that is 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 "unemployment benefits," "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

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, for example:

  • 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 as the result of a labor dispute

Unemployment Income Taxation

Unemployment income is fully taxable as ordinary income. Recipients of this benefit are sent a Form 1099-G at year-end detailing the total amount of benefits received, which they must report on their 1040 form. Unemployment benefits were first introduced along with Social Security in 1935. Unemployment income is designed to provide subsistence income for a given length of time, giving the unemployed recipient time to find another job.

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, as of 2018 Minnesota had one of the highest maximum weekly benefit amounts at $683, topped only by Massachusetts at $742 (+$25 per child). Massachusetts allows up to 30 weeks of payments; Minnesota offers 26. Though not lowest, Florida's $275 maximum weekly benefit and 12 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 CARES Act and Unemployment Income

On March 27, 2020, President Trump signed into law a $2 trillion coronavirus (COVID19) emergency stimulus package called the Coronavirus Aid, Relief, and Economic Security (CARES) Act.6

The Act temporarily expands unemployment insurance benefits through three initiatives: the Pandemic Unemployment Assistance program, the Federal Pandemic Unemployment Compensation program and the Pandemic Emergency Unemployment Compensation program.