Unemployment benefits in the United States

Unemployment insurance is a federal-state program financed through federal and state payroll taxes (federal and state UI taxes),[10] except for Pandemic Unemployment Insurance aka PUA. <https://labor.ny.gov/ui/pdfs/pandemic-unemployment-assistance.pdf> which is funded by the United States government.<https://www.govinfo.gov/content/pkg/BILLS-116hr748enr/pdf/BILLS-116hr748enr.pdf> In most states employers pay state and federal unemployment taxes if:

(1) they pay wages to employees totaling $1,500 or more in any quarter of a calendar year; or,[10]

(2) they had at least one employee during any day of a week during 20 weeks in a calendar year, regardless of whether the weeks were consecutive. Some state laws differ from the federal law.[10]

To facilitate this program, the U.S. Congress passed 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. FUTA covers the costs of administering the Unemployment Insurance and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits which are triggered in periods of high state unemployment. FUTA also provides a fund from which states UI funds may borrow to pay benefits. As originally established, the states paid the federal government.[10]

Until June 2011, the FUTA tax rate was 3% of taxable wages collected from employers of at least four employees,[11] and employers could 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.[12] As of June 30, 2011, the FUTA tax rate is 6.0% of taxable wages of employees who meet both the above and following criteria,[10] and the taxable wage base is the first $7,000 paid in wages to each employee during a calendar year.[10] 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%), for a maximum FUTA tax of $42.00 per employee, per year (.006 X $7,000 = $42.00). State law determines individual state unemployment insurance tax rates.[10] In the United States, unemployment insurance tax rates use experience rating.[13]

Although FUTA mandates a taxable wage base for each state/territory is $7,000, only four states or territories use this minimum.[14] These are Arizona, California, Florida, and Puerto Rico. Florida and Puerto Rico tax rates are similar to those of other states, but Arizona and California have a higher maximum rate. Florida's minimum and maximum tax rates are 0.1% and 5.4%;[15] Puerto Rico's are 2.4% and 5.4% depending on employer experience rating.[16] As of 2015, Arizona's were 0.03% and 7.79%.[17] California's tax rate on the taxable wage base is higher than the federal minimum of 6.0%; employers are on a tax schedule that requires them to pay 1.5% to 6.2% of the taxable wage base.[18] Even with the federal tax credit of 5.4%, Arizona employers could end up paying $175 per employee ((.0779-.054) x $7,000) and California employers could pay $56 per employee ((.062-.054) x $7,000) versus the FUTA maximum of $42.

Within the above constraints, individual states and territories raise their own contributions and run their own programs. The federal government sets broad guidelines for coverage and eligibility, but states vary in how they determine benefits and eligibility.

Federal rules are drawn by the United States Department of Labor, Employment and Training Administration. For most states, the maximum period for receiving benefits is 26 weeks. There is an extended benefit program (authorized through the Social Security Acts) that may be triggered by the state unemployment rate. Congress has 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,[19] and remained in force through June 2, 2010, with the Extended Unemployment Compensation 2008 legislation.[20] 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.

The federal government lends money to the states for unemployment insurance when states run short of funds which happens when the state's UI fund cannot cover the cost of current benefits. A high unemployment rate shrinks UI tax revenues and increases expenditures on benefits. State UI finances and the need for loans are exacerbated when a state cuts taxes and increases benefits. FUTA loans to state funds are repaid with interest.

Congressional actions to increase penalties for states incurring large debts for unemployment benefits led to state fiscal crises in the 1980s.

One interesting feature of the UI tax is that it targets firms that have recently had layoffs, potentially hitting distressed firms. Recent work shows that UI tax increases significantly reduce hiring and employment in affected firms, potentially eroding the macroeconomics stabilizing influence of the UI program.[21]

In order to receive benefits, a person must have worked for at least one quarter in the previous year and have been laid-off by an employer. Workers who were temporary or were paid under the table are not eligible for unemployment insurance. If a worker quits without good cause or is fired for misconduct, then they are normally not eligible for UI benefits. There are five common reasons a claim for unemployment benefits are denied: the worker is unavailable for work, the worker quit his or her job without good cause, the worker was fired for misconduct, refusing suitable work, and unemployment resulting from a labor dispute.[22][23] In practice, it is only practical to verify whether the worker quit or was fired. 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.[24] However, if the employee quit their job, then they must prove that their voluntary separation must be good cause.

Generally, the worker must be unemployed through no fault of his/her own although workers often file for benefits they are not entitled to; when the employer demonstrates that the unemployed person quit or was fired for cause the worker is required to pay back the benefits they received. The unemployed person must also 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.[25] Unemployment benefits 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[26].

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; this may depend on State legislation. Before the passage of the American Recovery and Reinvestment Act, the maximum number of weeks allowed was 26.

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.[25] 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.

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.[25] 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 substantially that the termination of employment is a misconduct defined by individual states laws.[24] However, if the employee quit their job, then they must prove that their voluntary separation must be for good cause. Success rate of unemployment appeals is two-thirds, or 67% of the time for the most claimants.[27][28] In the state of Oklahoma, claimants generally win 51.5% of the time in misconduct cases.[29] In the State of New Jersey, claimants that were discharged as a result of a misconduct may still receive unemployment benefits after their disqualification period of six week has ended[30].

The argument for taxation of social welfare benefits is that they result in a realized gain for a taxpayer. The argument against taxation is that the benefits are generally less than the federal poverty level.

Unemployment compensation has been taxable by the federal government since 1987.[31] Code Section 85 deemed unemployment compensation included in gross income.[32] Federal taxes are not withheld from unemployment compensation at the time of payment unless requested by the recipient using Form W-4V.[31][33] In 2003, Rep. Philip English introduced legislation to repeal the taxation of unemployment compensation, but the legislation did not advance past committee.[31][34] Most states with income tax consider unemployment compensation to be taxable.[31] Prior to 1987, unemployment compensation amounts were excluded from federal gross income.[35] For the US Federal tax year of 2009, as a result of the signing of the American Recovery and Reinvestment Act of 2009 signed by Barack Obama on February 17, 2009 the first $2,400 worth of unemployment income received during the 'tax year' of 2009 will be exempted from being considered as taxable income on the Federal level, when American taxpayers file their 2009 IRS tax return paperwork in early 2010.

In 2013, it was reported that most U.S. states deliver unemployment benefits to recipients who do not have a bank account through a prepaid debit card.[36] The federal government uses the Direct Express Debit Mastercard prepaid debit card offered by Mastercard and Comerica Bank to give some federal assistance payments to people who do not have bank accounts. Many states have similar programs for unemployment payments and other assistance.