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Unemployment insurance how does it work

unemployment insurance how does it work

How does unemployment insurance work?

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Unemployment insurance provides a temporary safety net to workers who lose their jobs by replacing a portion of their salary for certain periods. Each state administers its own unemployment insurance program so some rules may vary from state to state.

To receive unemployment insurance payments, you must have lost your job through no fault of your own. If you quit your job or lost it because of poor performance or another justifiable reason, you are not eligible for unemployment insurance benefits. State unemployment insurance programs require claimants to have worked sufficiently before they can claim benefits.

As soon as you apply for unemployment insurance, an agency with the state in which you live will verify that you were a victim of a layoff by contacting your previous employer and making sure you lost your job due to lack of work and not an action within your control.

After the state verifies you were indeed the victim of a layoff, your weekly payment is calculated. Your payment will be a percentage of what you made in your previous job, generally between 20 percent and 50 percent, depending on your state. Unemployment insurance replaces only a portion of your previous pay because it is intended to pay only for the essentials of living such as food and utilities until you find new employment.

Before you begin receiving benefits, you must complete a waiting period of typically one or two weeks. If you find a new job during this period, you will not be eligible for unemployment benefits, even if the job does not pay you as much as your previous job. After the waiting period, you will begin to receive your weekly payments.

Employers pay for unemployment insurance through payroll taxes. So, while employees' work and earnings history are important to funding their unemployment benefits, the money does not come from their pay. Employer unemployment insurance contributions depend on several factors, including how many former employees have received benefits.

Employers pay taxes on an employee's

base wages, which vary by state. California, for example taxes employers on the first $7,000 of an employee's annual earnings, while neighboring Oregon taxes up to $32,000 of wages. Employers must set aside funds each payroll period and then report taxes and pay their states quarterly.

States have several categories of tax rates they charge employers. New businesses and those first adding employees pay the "new rate," which is typically lower and geared toward small businesses. Established businesses who haven't paid their taxes recently or properly are usually assessed the "standard rate" --- the highest possible tax rate, which in 2010 ranged from 5.4 percent in several states including Georgia, Hawaii and Alaska to 13.56 percent in Pennsylvania. Businesses in good standing may receive discounts under the "experienced rate." Depending on the number of employees a business has and how many former employees have claimed unemployment, states can give sizable rate reductions. The fewer claims, the lower the rate a business pays in unemployment insurance taxes.

As a result of the economic crisis legislation has been passed to extend Unemployment benefits.

Regular unemployment benefits are paid for a maximum of 26 weeks in most states. However, additional weeks of extended unemployment benefits are available during times of high unemployment.

The unemployment extension legislation passed by Congress in February 2012 changed the way the tiers of Emergency Unemployment Compensation (EUC) are structured. A tier of unemployment is an extension of a certain amount of weeks of unemployment benefits. There are currently four tiers of unemployment benefits. Each tier provides extra weeks of unemployment in addition to basic state unemployment benefits.

Emergency Unemployment Compensation (EUC) Tiers June - August 2012:

  • Tier 1: 20 weeks
  • Tier 2: 14 weeks if the state unemployment rate is 6% or higher
  • Tier 3: 13 weeks if the state unemployment rate is 7% or higher
  • Tier 4: 6 weeks if the state unemployment rate is 9% or higher

Source and further information can be found here - Unemployment Tiers -

Category: Insurance

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