What Is Unemployment Insurance?

Losing a job can lead to financial ruin if you don't have a backup plan. Thankfully, unemployment insurance is there to serve as a source of protection for eligible workers. Unemployment insurance is a joint federal-state program that provides monetary benefits to eligible employees who experience job loss. If you've lost a job through no fault of your own, then it's a good idea to immediately file for unemployment so you can collect benefits while you look for work.

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How unemployment insurance works

Businesses of a certain size are required to pay unemployment insurance taxes based on the wages they pay their employees. This money is then used to pay benefits to workers who lose their jobs as a result of downsizing or other unavoidable circumstances.

Though all states follow the same general federal guidelines for the program, the finer points of unemployment insurance can vary from state to state. For example, each state establishes its own set of eligibility requirements, and the amount of money you'll get in unemployment benefits also depends on where you work. Generally, you must have worked a certain amount of time or earned a certain amount of money within the one-year period leading up to your job loss to be eligible for unemployment.

Will unemployment replace my entire paycheck?

Unemployment insurance is not designed to replace your paycheck in its entirety. Rather, it's meant to replace a portion of your earnings to help you stay afloat financially as you look for a new job. The weekly benefit amount you're eligible to receive will depend on how much you earned before you were let go and the state you worked in. Furthermore, the unemployment benefits you receive are subject to taxes. You can typically choose to either have taxes withheld up front or pay taxes on your benefits when you file your return.

Who's eligible for unemployment benefits?

Unemployment benefits are available to workers who lose their jobs through no fault of their own. If you quit your job or are fired for gross negligence, then you're not eligible to receive benefits. If you're laid off or fired for reasons other than gross negligence (e.g., personal reasons), then you're likely eligible. Freelance and self-employed workers generally cannot collect unemployment regardless of why they're out of work.

Once your unemployment claim is approved, you'll typically need to file for weekly benefits. To continue getting paid, you must be actively looking for work. Some states may even require that you submit proof of a job search or attend mandatory training sessions in order to continue receiving benefits.

Have an emergency fund

Though unemployment insurance can be a critical source of income following the loss of a job, it's never a good idea to rely on it entirely. This is especially true for high earners, as weekly benefits are capped at a certain amount. For example, the current maximum benefit in New York is $430 a week, which translates to either $1,720 or $2,150 a month, depending on whether you're looking at four weeks or five. For someone earning $120,000 a year, or $10,000 a month, neither amount will be enough to cover the bills. That's why it's important to always have an emergency fund in place. Ideally, your emergency savings should be enough to cover three to six months' worth of living expenses. While unemployment insurance can help you pay your living costs when you don't have another source of income to rely on, it's usually not enough for most people to tackle their expenses in full.

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