What Is Unemployment Insurance?

Unemployment insurance, also called unemployment benefits, is a type of state-provided insurance that pays out when you lose your job and meet certain eligibility requirements. You will not receive unemployment benefits if you quit your job, are self-employed, or if you are fired for cause. The benefits are primarily paid out by state governments and funded by specific payroll taxes collected for that purpose.

Key Takeaways

  • Benefits under unemployment insurance, also called unemployment compensation, last up to 26 weeks, depending on the state in which you live.
  • You do not qualify for unemployment insurance if you quit your job or are fired for cause.
  • The U.S. Department of Labor oversees the unemployment insurance program.
  • Three programs established by the 2020 CARES Act are designed to help out-of-work Americans, including those who ordinarily would be ineligible to access unemployment funds.

Understanding Unemployment Insurance

The unemployment initiative is a joint program between individual state governments and the federal government. Unemployment insurance provides cash stipends to unemployed workers who actively seek employment. Compensation to eligible, unemployed workers is through the Federal Unemployment Tax Act (FUTA) along with state employment agencies.  

Each state has an unemployment insurance program, but all states must follow specific guidelines outlined by federal law. Federal law makes unemployment benefits relatively ubiquitous across state lines. The U.S. Department of Labor oversees the program and ensures compliance within each state.

Workers who meet specific eligibility requirements may receive up to 26 weeks of cash benefits a year. The weekly cash stipend is designed to replace half of the employee's regular wage, on average. States fund unemployment insurance using taxes levied on employers. The majority of employers will pay both federal and state unemployment FUTA tax. Companies that have 501(c)3 status do not pay FUTA tax. Three states also require minimal employee contributions to the state unemployment fund. Reportable income includes freelance work or jobs that unemployment insurance recipients were paid for in cash.

If you're unemployed due to COVID-19, you may be eligible for one of the government relief programs such as Federal Pandemic Unemployment Compensation (FPUC) or Lost Wages Assistance (LWA). Our guide to how to file for unemployment insurance may be able to help.

Out of work persons who do not find employment after a 26-week period may become eligible for an extended benefits program, if it is available. Extended benefits give unemployed workers an additional 13 to 20 weeks of unemployment benefits. The availability of extended benefits will depend on a state's overall unemployment situation. Pandemic Emergency Unemployment Compensation (PEUC), one of the three special COVID-19 programs (see below), extends unemployment benefits for 13 weeks.

Eligibility and Claim Requirements

An unemployed person must meet two primary requirements to qualify for unemployment insurance benefits. An unemployed individual must meet state-mandated thresholds for either earned wages or time worked in a stated base period. The state must also determine that the eligible person is unemployed through no fault of their own. A person may file an unemployment insurance claim when fulfilling these two requirements.

Individuals file claims in the state where they worked. A participant may file claims by phone or on the state unemployment insurance agency's website. After the first application, it generally takes two to three weeks for processing and approval of a claim. 

After approval of a claim, the participant must either file weekly or bi-weekly reports that test or confirm their employment situation. Reports must be submitted to remain eligible for benefit payments. 

An unemployed worker cannot refuse work during a week, and on each weekly or bi-weekly claim, they must report any income that they earned from freelance or consulting gigs.

$2 trillion

The amount of emergency stimulus in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, part of which is designed to aid people who are out of work.

Special Considerations

Unemployment has risen On March 11, 2020 the World Health Organization declared COVID-19, the illness caused by a novel coronavirus, to be a pandemic. States and businesses across the U.S. have been forced to close down, causing massive unemployment. Lawmakers agreed on the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, landmark legislation that, in part, expands states' ability to provide UI to millions of workers affected by COVID-19, including people who aren't ordinarily eligible for unemployment benefits.

Three specific programs are designed to help Americans who are out of work because of the coronavirus:  A fourth program was established through an Aug. 8, 2020, memorandum issued by President Trump in response to the expiration of the Federal Pandemic Employment Compensation program.   

  • Federal Pandemic Unemployment Compensation (FPUC), which provides an extra $600 weekly benefit on top of regular unemployment insurance (UI). According to the U.S. Department of Labor, “FPUC is not payable for any week of unemployment ending after July 31, 2020. Accordingly, in states where the week of unemployment ends on a Saturday, the last week that FPUC may be paid is the week ending July 25, 2020. For states where the week of unemployment ends on a Sunday, the last week that FPUC is payable is the week ending July 26, 2020."
  • Pandemic Unemployment Assistance (PUA), which expands UI eligibility to self-employed workers, freelancers, independent contractors, and part-time workers.
  • Pandemic Emergency Unemployment Compensation (PEUC), which extends UI benefits for an extra 13 weeks after regular unemployment compensation benefits have been exhausted.
  • The Lost Wages Assistance (LWA) program is a federal-state unemployment benefit that provides $300 to $400 in weekly compensation to eligible claimants. The Federal government through the Disaster Relief Fund (DRF) provides $300 per claimant per week and states are asked to provide the remaining $100. LWA came into existence in response to the expiration of FPUC July 31, 2020.

If you have applied or are planning on applying for unemployment insurance under the Pandemic Unemployment Assistance (PUA) program, be sure to check with your individual state to determine when your last PUA payment will be issued.

Most states recommend that you make an unemployment claim online during the pandemic. To find out the rules in your state, check with your state's unemployment insurance program.