What is unemployment insurance and how does it work?

No one wants to be out of work. And losing a job or a source of income can be extremely stressful. But it’s important to know that there could be support available in the form of unemployment insurance benefits.

Unemployment insurance provides eligible people with temporary cash benefits while they’re out of work. But that financial assistance isn’t guaranteed or immediate. So it can be helpful to learn what the options are, how to get started and what to expect during the process.

Key takeaways

  • Unemployment insurance is a joint federal-state program managed by the U.S. Department of Labor and each individual state.
  • Unemployment insurance offers temporary cash benefits to unemployed workers who meet certain requirements.
  • Typically, people who have lost their job through no fault of their own, meet their state’s work and wage guidelines, and meet any other state requirements qualify for unemployment insurance. 
  • You can apply for unemployment benefits through your state’s unemployment office. 

Working on Your Credit?

Explore topics that help you move the needle on your credit, wherever you are on your journey.

Start Now

What is unemployment insurance? 

Unemployment insurance is a benefits program administered jointly by the U.S. Department of Labor and the states. The program gives cash benefits, usually in the form of weekly payments, to eligible workers who become unemployed through no fault of their own. 

All states must follow the same federal guidelines. But each state administers a separate unemployment insurance program. That means benefits can vary by state. If you’re unemployed, the Department of Labor recommends contacting your state’s unemployment insurance program as soon as possible.

How does unemployment work?

Typically, the amount someone gets from unemployment insurance is based on a percentage of their lost wages. And in most states, eligible people can receive unemployment benefits for up to 26 weeks. But extended unemployment benefits might be available in some cases, like during times of high unemployment.

The Department of Labor also says that the unemployed person should file a claim as soon as they become unemployed. And generally, they should file for unemployment in the state where they worked. Keep in mind that it can take a few weeks to receive the first check after filing an unemployment claim.

Who qualifies for unemployment insurance? 

According to the Department of Labor, workers can typically qualify for unemployment benefits if they meet three requirements: 

  1. They are unemployed through no fault of their own. Generally, this means that someone lost their job because of layoffs. If someone quits their job or gets fired for a valid reason, they may not qualify for unemployment insurance.
  2. They meet their state’s work and wage guidelines. States may have requirements for money earned or hours worked during a certain window of time. Someone may be required to work a certain number of hours during four of the past five calendar quarters to qualify for unemployment benefits, for example.
  3. They meet additional state requirements. State programs may have their own additional requirements. Workers can use the Department of Labor’s unemployment benefits finder or use the links below to learn more about their state’s unemployment insurance guidelines.

How to apply for unemployment benefits

The Department of Labor says to apply for unemployment benefits in the state where you worked. If you live and work in different states or if you worked in multiple states, the Department of Labor suggests getting guidance by contacting the unemployment insurance program of the state in which you live.

How to find your state’s unemployment office

Here’s a list of links to each state’s unemployment insurance website—Washington, D.C., Puerto Rico, the U.S. Virgin Islands and Guam are included, too. Click on your state to learn more about how your program works and how to apply.

Documentation needed to apply for unemployment

In general, the Department of Labor says you can expect to be asked for information about things like the addresses of your former employers and the dates you worked there. It may be helpful to gather documents related to your previous work, such as 1099s, tax returns and pay stubs.

Giving complete and correct information can help prevent your unemployment claim from being delayed. Having additional information ready may also help make the process smoother. Those details may include:

  • Employment or contract history for the previous 18 months—including contact info for companies where you worked, dates and hours worked, wages earned, and hourly rates.
  • Proof of identity.
  • Bank account information for direct deposit.

Remember, each state’s claims process is different—and it may take some time for your claim to be handled. But budgeting and planning to figure out what to do while you wait for unemployment benefits could help you get by in the meantime.

Watch out for unemployment scams

The Department of Labor also warns applicants to beware of scams. It says unemployment insurance programs will never charge a fee to provide you with information or to allow you to apply for benefits. Learn more about phishing and how to avoid scammers.

Unemployment insurance FAQs

Who pays for unemployment benefits?

Generally, employers pay both state and federal unemployment taxes. And those taxes fund unemployment insurance. In some states, employees also pay some unemployment tax. 

What happens once I start receiving unemployment benefits?

Once you’ve qualified and started receiving benefits, the process may not be over. Some states require people receiving benefits to regularly certify that they’re still eligible for them. Check with your state’s unemployment office for more information.

Are unemployment benefits taxable?

Yes, unemployment benefits are subject to federal income tax—and potentially state and local income taxes, depending on where you live. 

You may be able to have federal taxes withheld upfront, which could make things easier when it comes time to file taxes. Saving receipts and tracking how you’re using your benefits could also help you stay organized when you’re dealing with taxes.

How will new work or jobs affect unemployment compensation? 

You may be able to accept new jobs while receiving benefits. But be sure to report your income to avoid committing unemployment insurance fraud. You may still be entitled to assistance, but new work could affect how much you receive.

Do I need to keep looking for work if I receive unemployment benefits?

You may be required to certify that you’re still unemployed and actively looking for work. Check with your state about what qualifies as looking for work—and whether it’s necessary.

Where can I find more unemployment resources?

If you still have questions about unemployment insurance, the Department of Labor sponsors CareerOneStop. It has answers to frequently asked questions and plenty of other resources.

Depending on your circumstances, you may be able to get support from grants, charitable funds and crowdsourcing efforts.

The emotional effects of financial challenges can be tough to deal with. If you’re having trouble, the Department of Health and Human Services has tips for coping with stress that may help.

Unemployment insurance in a nutshell

No matter how prepared you are, losing a job is hard for anyone. But by planning ahead, you may be able to ease some of the financial strain.

Building an emergency fund and creating a budget can help get you through tough times. If you’ve been unexpectedly laid off and need help making a plan, learn about some ways to deal with financial emergencies and how to plan financially after being laid off.

Related Content