Unemployment insurance in the United States, colloquially referred to as unemployment benefits, refers to social insurance programs which replace a portion of wages for individuals during unemployment. The first unemployment insurance program in the U.S. was created in Wisconsin in 1932, and the federal Social Security Act of 1935 created programs nationwide that are administered by state governments. The constitutionality of the program was upheld by the Supreme Court in 1937.
Each of the 50 U.S. states, as well as the District of Columbia, Puerto Rico, and U.S. Virgin Islands, administer their own unemployment insurance programs. Benefits are generally paid by state governments, funded in large part by state and federal payroll taxes levied on employers, to workers who have become unemployed through no fault of their own. Employees in Alaska, New Jersey and Pennsylvania are also required to contribute into the program. Benefit amounts for eligible workers vary by state, ranging from maximum weekly payments of $1,015 in Massachusetts to $235 in Mississippi as of 2022. According to the Internal Revenue Code, these benefits are classified as "social welfare benefits" and as such are included in a taxpayer's gross income. The standard duration of available unemployment compensation is six months, although extensions are possible during economic downturns. During the Great Recession, unemployment benefits were extended by 73 weeks.
Eligibility requirements for unemployment insurance vary by state, but generally speaking, employees not fired for misconduct ("terminated for cause") are eligible for unemployment benefits, while those fired for misconduct (this sometimes can include misconduct committed outside the workplace, such as a problematic social media post or committing a crime) are not. In every state, employees who quit their job without "good cause" are not eligible for unemployment benefits, but the definition of good cause varies by state. In some states, being fired for misconduct completely invalidates the employee's unemployment claim, while in others it only disqualifies the employee from receiving unemployment benefits for a short period.
History As many European countries created unemployment insurance programs in the early 20th century (beginning with Britain in 1912), Progressive Era reformers advocated for a similar policy in the United States, but to little avail. In the early 20th century, some trade unions and employers set up private unemployment insurance programs for workers, but these were only available to a small portion of the workforce. Following the onset of the Great Depression, advocates pushed Congress and state legislatures to create public unemployment insurance programs. In 1931, governors from New York, Ohio, Massachusetts, Pennsylvania, New Jersey, and Connecticut organized an interstate commission on unemployment insurance. In 1932, Wisconsin passed the first public unemployment insurance program in the United States, offering 50% wage compensation for a maximum of 10 weeks, funded through a payroll tax imposed on employers.
Programs were created in other states following the passage of the federal Social Security Act of 1935. Under Title III of the Act, the federal government would levy a payroll tax on almost all employers to fund unemployment insurance programs run by state governments, conditional on states following certain minimum requirements concerning program administration. In states that levied their own taxes to administer programs that exceeded the requirements, the federal government would forgive this payroll tax. The terms of this federal-state cooperation are set by the Federal Unemployment Tax Act (FUTA), which authorizes the Internal Revenue Service (IRS) to collect an annual federal employer tax used to fund state workforce agencies. In 1937, the Supreme Court held that federal unemployment law is constitutional and does not violate the Tenth Amendment in Steward Machine Company v. Davis, 301 U.S. 548.
Beginning in 1954 under the Reed Act, the federal government transfers unemployment funds to state governments when the federal balance exceeds a certain threshold. Additionally, FUTA provides a fund that states can borrow from when needed to continue paying UI benefits. In 1970, FUTA was amended to create an extended benefits program where the federal government pays half the cost of extended benefits triggered during periods of high state-level unemployment.
In 1986, the Tax Reform Act required that unemployment compensation be considered taxable income for the purposes of federal taxes."Revenue Ruling 71–425". Internal Revenue Service. Taxlinks.com. In 2003, Rep. Philip English introduced legislation to repeal the taxation of unemployment compensation, but the legislation did not advance past committee. Most states with income tax consider unemployment compensation to be taxable. Under the American Recovery and Reinvestment Act of 2009, the first $2,400 worth of unemployment income received during the tax year of 2009 was exempted from being considered as taxable income on the federal level.
Structure
Taxation
Unemployment insurance is funded by both federal and state payroll taxes. In most states, employers pay state and federal unemployment taxes if: (1) they paid wages to employees totaling $1,500 or more in any quarter of a calendar year, or (2) they had at least one employee during any day of a week for 20 or more weeks in a calendar year, regardless of whether those weeks were consecutive. Some state laws differ from the federal law.
Since June 2011, the Federal Unemployment Tax Act (FUTA) has set the taxable wage base as the first $7,000 of wages paid to each employee during a calendar year, and the tax rate as 6% of taxable wages. Employers can deduct up to 90% of the amount due if they paid taxes to a state to support a system of unemployment insurance which met Federal standards. Employers who pay the state unemployment tax on time receive an offset credit of up to 5.4% regardless of the rate of tax they pay their state. Therefore, the net FUTA tax rate is generally 0.6% (6.0%–5.4%) on the taxable amount of $7,000, for a maximum FUTA tax of $42.00 per employee per year.
State law determines individual state unemployment insurance tax rates and taxable wage bases. Although FUTA mandates a taxable wage base of $7,000 per employee, only Arizona, California, and Puerto Rico use this minimum as of 2020. The taxable wage base ranges significantly, with Washington using the highest amount of $52,700. All states use experience rating to determine tax rates, meaning that employers using the system more often have to pay additional taxes. As such, the range of state unemployment tax rates varies widely. For example, as of 2020, the state employer tax range for unemployment insurance is 0.05%–6.42% in Arizona, 1.5%–6.2% in California, 0.94%–14.37% in Massachusetts, and 0.1%–5.5% in Oklahoma.
An exception to the federal-state joint funding mechanism is the Pandemic Unemployment Insurance (PUA) program created during the COVID-19 pandemic, which is funded entirely by the federal government.
Eligibility The federal government sets broad guidelines for coverage and eligibility, but states vary in how they determine benefits and eligibility. Generally, the following requirements apply:State Unemployment Benefits US Department of Labor
A worker must have worked for at least one quarter in the previous year. Workers are normally not eligible if they were temporary workers or paid under the table. A worker must meet state requirements for wages earned or time worked during an established period of time (referred to as a "base period") to be eligible for benefits. In most states, the base period is usually the first four out of the last five completed calendar quarters prior to the time that the claim is filed. A worker must have been laid off by an employer. Workers are not normally eligible if they quit without good cause, are fired for misconduct, or became unemployed due to a labor dispute. If the employer demonstrates that the unemployed person quit or was fired for cause, the worker is required to pay back the benefits they received. A worker must be available for work and must accept a suitable offer of employment
If the worker's claim is denied, then they have the right to appeal. If the worker was fired for misconduct, then the employer has the burden to prove that the termination of employment is a misconduct defined by individual states laws. However, if the employee quit their job, then they must prove that their voluntary separation must be good cause.
Benefit amount and duration Unemployment benefit amounts are based on reported covered quarterly earnings. The amount of earnings and the number of quarters worked are used to determine the length and value of the unemployment benefit. The national average weekly payment in 2020 was $378. Since 1987, unemployment compensation has been considered taxable income by the federal government.
For most states, the maximum period for receiving benefits is 26 weeks. Since a 1970 amendment to FUTA, there has been an extended benefit program that may be triggered by the state unemployment rate. Congress has also often passed temporary programs to extend benefits during recessions. This was done with the Temporary Extended Unemployment Compensation (TEUC) program in 2002–2003, which has since expired, and remained in force through June 2, 2010, with the Extended Unemployment Compensation 2008 legislation. As a result of the American Recovery and Reinvestment Act passed in February 2009, many unemployed people receive up to 99 weeks of unemployment benefits, contingent on state legislation. In July 2010, legislation that provides an extension of federal extended unemployment benefits through November 2010 was signed by the president. The legislation extended benefits for 2.3 million unemployed workers who had exhausted their unemployment benefits.
Application process It generally takes two weeks for benefit payments to begin, the first being a "waiting week", which is not reimbursed, and the second being the time lag between eligibility for the program and the first benefit actually being paid.
To begin a claim, the unemployed worker must apply for benefits through a state unemployment agency. In certain instances, the employer initiates the process. Generally, the certification includes the affected person affirming that they are "able and available for work", the amount of any part-time earnings they may have had, and whether they are actively seeking work. These certifications are usually accomplished either over the Internet or via an interactive voice response telephone call, but in a few states may be by mail. After receiving an application, the state will notify the individual if they qualify and the rate they will receive every week. The state will also review the reason for separation from employment. Many states require the individual to periodically certify that the conditions of the benefits are still met.
Federal taxes are not withheld from unemployment compensation at the time of payment unless requested by the recipient using Form W-4V.
Disqualification and appeals
If a worker's reason for separation from their last job is due to some reason other than a "lack of work," a determination will be made about whether they are eligible for benefits. Generally, all determinations of eligibility for benefits are made by the appropriate state under its law or applicable federal laws. If a worker is disqualified or denied benefits, they have the right to file an appeal within an established time-frame. The state will advise a worker of his or her appeal rights. An employer may also appeal a determination if they do not agree with the state's determination regarding the employee's eligibility.