What Is Unemployment Income?

Unemployment Income Explained in Less Than 5 Minutes

A woman looks at her computer while taking notes during her job search
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Unemployment income is an insurance benefit provided by both the federal and state government that is essentially money paid to eligible workers who have lost their jobs through no fault of their own.

Because there is specific criteria that recipients must meet, it's important to learn more about what unemployment income is, how it works, who qualifies for it, and how it is administered.

Definition and Example of Unemployment Income

Unemployment income is money paid to out-of-work people who meet certain criteria, such as being in between jobs and being out of work through no fault of their own.

  • Alternate Names: Unemployment compensation, unemployment benefits, unemployment insurance payments

For example, if you are laid off from your job in California because your company decided to do away with your position, you may be eligible to apply for and receive unemployment income of $40 to $450 per week.

How Does Unemployment Income Work?

In the United States, unemployment income is administered by state unemployment offices in partnership with the federal government. It is intended to provide temporary wage replacement to workers who are actively seeking their next job.

In 1932, Wisconsin became the first state to provide unemployment income to its out-of-work residents.  Three years later, in 1935, the Social Security Act established a nationwide framework for states to create their own unemployment income programs.

Although the federal government has unemployment guidelines that states must follow, each state has its own unemployment income rules, requirements, and application process.

For example, states vary in the maximum length of time unemployed workers can obtain unemployment income.  Most states pay unemployment income for up to 26 weeks, but Arkansas, for example, only offers a maximum of 14 weeks, and Massachusetts offers a maximum of 30 weeks.

State Unemployment Benefits

People seeking to receive unemployment income, then, must meet their state’s eligibility requirements and apply to receive unemployment income with their state. In most cases, their unemployed status must be as a result of circumstances beyond their control, such as being laid off or the company they work for going out of business. People who are terminated for breaking company rules or who quit their jobs without just cause are usually not eligible to receive unemployment benefits. 

State unemployment income administration and benefits are funded through both federal and state taxes. At the federal level, employers pay the Federal Unemployment Tax (FUTA) that is used to fund federal- and state-level administrative costs associated with distributing unemployment income.

Employers—and, in some states, employees—also pay state unemployment taxes in amounts set by each state.  These taxes fund the state’s unemployment trust fund from which benefits are paid.

How Much Are Unemployment Income Taxes?

In general, unemployment income is considered taxable income on your federal income tax return.  It is taxed as ordinary income using the tax rates currently in effect for your filing status.  So unemployment compensation received in 2021 may be taxed at a rate as low as 0% (if your taxable income is below the standard deduction amount for your filing status) or as high as 35% for federal income tax purposes.

After the new year, states issue unemployment income recipients a Form 1099-G indicating the amount of unemployment income they received the previous year.

For 2020 tax returns, Congress made the first $10,200 of unemployment income tax-free for taxpayers with a modified adjusted gross income (AGI) of less than $150,000.  Unless Congress passes additional legislation on this issue, this exclusion is a special exception only for tax year 2020.

Some states offer recipients of unemployment income the option to have taxes withholding from their payments. Recipients who do not opt for unemployment income withholding may want to consider making estimated tax payments to avoid paying an underpayment of estimated tax penalty.

State taxation of unemployment income varies, with some states such as California exempting unemployment income from state income tax but other states such as New York taxing unemployment income.

How To Get Unemployment Income

In order to get unemployment income, there are some important steps to follow.

  1. You must first make sure you qualify. This generally means, at a minimum, being unemployed through no fault of your own, meeting your state’s work and wage requirements, being able and available for work, and actively seeking work.
  2. Your state may have other requirements as well, so be sure to check with your state’s unemployment insurance office before applying.
  3. After making sure you are eligible for unemployment income, you must apply with your state. Even if you are approved to receive unemployment income, keep in mind that it may be a few weeks before you receive your first payment.
  4. After you are approved, it is important that you meet your state’s eligibility requirements every week in order to continue receiving benefits. While each state has different rules, common maintenance requirements include being able to work, actively looking for work, reporting any earnings you had each week, and filing a weekly certification.
  5. If your state denies your claim for unemployment income benefits, you can appeal its decision.  Each state has different rules concerning how and when you may file an appeal.

Key Takeaways

  • Unemployment income is money that is typically paid to individuals who are unemployed through no fault of their own.
  • Each state administers its own unemployment income program, though the state must follow guidelines set by the federal government.
  • Some states impose a state income tax on unemployment benefits, while others don’t.
  • If you believe you may be eligible to receive unemployment income, check with your state unemployment office to learn about eligibility, application, and benefits maintenance process.