How Unemployment Works

Unemployment insurance is a joint program of the federal and state governments, intended to provide a safety net to those who are temporarily out of work. Federal law sets the general guidelines, while states determine the specifics, such as eligibility requirements, benefit amounts, and so on. This article explains how unemployment benefits work.

Who Pays for Unemployment?

Unemployment is paid by employers. Employers must report and pay federal unemployment tax (FUTA) for each covered employee. The FUTA rate in recent years has been 6.2% of the first $7,000 of the employee's wages for the year. However, employers who participate in a state unemployment program receive a credit against their FUTA liability of up to 5.4%, which means employers only have to pay .08% (or $56 per employee) in FUTA. If the state had to borrow money from the federal government to pay its unemployment benefits (as many have recently), the credit will be smaller.

When an employer first starts paying into the system, it pays at the "new employer" rate. Once the employer has been paying taxes for a few years (the exact amount of time depends on state law), it will receive an "experience rating." Employers with more unemployment claims against them will pay a higher rate, and employers with fewer claims will pay less.

Who Can Receive Unemployment?

Not every person who's out of work is eligible for unemployment benefits. First, certain categories of employees aren't covered by the program, including those who were paid solely on commission, employees of small farms, and adults who are employed by a spouse or child. Second, employees must meet eligibility requirements to qualify. State law determines the details, but the general eligibility requirements are:

  • You must meet your state's minimum earnings and/or work requirements. Only employees who have worked at least a certain amount prior to become unemployed qualify.
  • You must be able, available, and looking for work.
  • You must be out of work through no fault of your own. If you quit your job without good cause, you won't qualify. The same is true if you were fired for serious misconduct, as your state defines it.

For more on each of these requirements, see Who Is Eligible for Unemployment?

How Do I Apply for Unemployment?

Each state has its own form and procedures to apply for unemployment; you can find out your state's rules from the state unemployment insurance agency. (For links to each state's unemployment website, see State Unemployment Agencies.) Most states allow applicants to file an application online, by phone, or by mail. You'll have to provide some basic information about yourself, your work history, and why you are unemployed. (For information on how to apply, see Unemployment Application Process.)

Someone from the state agency may contact you for an interview or a hearing, particularly if your reasons for being unemployed may render you ineligible for benefits. For example, if you quit your job, you may have to explain why you had good cause to quit and should receive benefits.

If the state finds that you qualify, it will send you an eligibility notice. In most cases, you should start receiving checks within a few weeks of applying.

How Do I Keep My Benefits Coming?

To keep collecting benefits, you'll have to file a claim form every week or two. Depending on your state's system, you might do this by mailing in a form, completing a form online, or calling the agency at a particular time and answering a few questions. The purpose of requiring benefit recipients to file claims is to make sure they are still able and available to work and still looking for a job. You may have to provide information on your job search on the claim form. You will also have to report any wages you've earned during the claim period.

When Will My Benefits Run Out?

Most states provide benefits for 26 weeks; recently, a handful of states have cut back on this number. In times of high unemployment, as we're facing now, the federal government makes additional benefits available. Currently, the federal government provides extended and supplemental benefits that could allow applicants in the states where unemployment is highest to receive benefits for up to 99 weeks; this amount is set to decrease in September 2012. (For more information on these programs, see How Long Do Unemployment Benefits Last?)