Filing for Unemployment Benefits

Last Updated: December 8, 2008  

The number of U.S. workers filing new claims for state unemployment benefits recently rose more than twice as much as expected to a 26-year high, according to a government report. The Labor Department reported that initial applications for jobless benefits in the week ending December 6 rose to a seasonally adjusted 573,000, further evidence of a recessionary economy.

For many Americans, filing for unemployment benefits is a daunting experience filled with both emotional and financial distress. But financial planners and others say there are ways to reduce at least some of the stress. From a financial planning and income tax perspective, here's an overview of what you need to know.

According to the Labor Department: "The Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law. Unemployment insurance payments (benefits) are intended to provide temporary financial assistance to unemployed workers who meet the requirements of state law. Each state administers a separate unemployment insurance program within guidelines established by federal law. Eligibility for unemployment insurance, benefit amounts and the length of time benefits are available are determined by the state law under which unemployment insurance claims are established.

In general, benefits are based on a percentage of an individual's earnings over a recent 52-week period — up to a state maximum amount, according to the Labor Department. Benefits can be paid for a maximum of 26 weeks in most states. "Unemployment compensation is not designed to be an income replacement," said Richard Corbett, a CPA whose firm bears his name. "A person should not expect to have his/her entire paycheck replaced by unemployment compensation. It really is designed as more of a safety net, to help you with living expenses such as food and lodging, and not the extras, such as credit card payments, while you get back on your feet."

Of note, on November 21, 2008, President Bush signed the Unemployment Compensation Extension Act of 2008. That new law expands Emergency Unemployment Compensation (EUC) to 20 weeks nationwide, and creates a second tier of 13 weeks of EUC for individuals in states with high unemployment rates. "If your benefits have run out, or are about to run out, and you still have not found a job, you need to contact your unemployment compensation office to see if you qualify for the extended benefits," said Corbett.

Eligibility

You may or may not be eligible to collect unemployment insurance, according to Melanie King, an unemployment law analyst with CCH. For instance, each state has its own rules with regard to commissioned sales representatives and real estate agents. Read "The Comparison of State Unemployment Insurance Laws" to learn the specific rules in your state. That guide provides state-by-state information on workers covered, benefit eligibility, methods of financing and other areas of interest in the Unemployment Insurance program. That guide can be found on the Labor Department Web site.

Regardless of the of the eligibility rules, King says it's worth applying for unemployment insurance. "It doesn't hurt to apply," she said. "The worst that can happen is that you'll be turned down."

According to the Labor Department, there are many reasons for denying benefit payments. The following is the Labor Department's list of some common reasons for denial:

• Voluntarily leaving work without good cause. Benefit payments can be paid if you quit under certain circumstances depending on your state's laws.
• Being discharged for misconduct connected with work. Misconduct is an intentional or controllable act, or failure to take action, which shows a deliberate disregard of the employer's interests.
• Not being able to work or available for work. You must be able, ready and willing to accept a suitable job.
• Refusing an offer of suitable work.
• Knowingly making false statements to obtain benefit payments.

If you've been denied unemployment benefits, the Labor Department recommends that you file an appeal and/or request reconsideration of your determination according to your state's unemployment laws and procedures. "While Federal laws pertaining to unemployment insurance include only broad requirements state laws must contain, it is up to each state to make determinations of eligibility based on its own laws," the Labor Department notes. "Only your 'State Workforce Agency' can make a determination to pay or deny benefits."

To find contact information for your state's workforce agency, visit this Web site.

How you leave your employer will also affect your eligibility, King said. For instance, a severance package can affect unemployment insurance benefits. King also notes that it's possible to have some earnings and still collect benefits. The amounts for partial employment do, however, vary state to state, she said.

Corbett also noted that most state unemployment compensation offices also provide assistance in job search, resume preparation, job training, interviewing and even networking opportunities to help you find a job.

The Labor Department has additional resources regarding unemployment insurance at these Web sites:

• http://www.dol.gov/dol/topic/unemployment-insurance/
• http://workforcesecurity.doleta.gov/unemploy/aboutui.asp  

Taxes

According to the Internal Revenue Service: "Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a state. It includes state unemployment insurance benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund. It also includes railroad unemployment compensation benefits, but not worker's compensation.

Unemployment income can be reported on any of the following tax forms:

• Form 1040EZ, Line 3
• Form 1040A, Line 13
• Form 1040, Line 19

If you received unemployment compensation, you should (or will) receive Form 1099-G, showing the amount you were paid. Any unemployment compensation received must be included in your income on the IRS reports. What's more, the IRS notes that you may be required to make quarterly estimated tax payments if you received unemployment compensation. One option to consider: You can choose to have federal and state income tax withheld. Corbett, for his part, strongly urged that you withhold some taxes. "The tax bill can come as a big shock in April if no taxes were withheld," he said.

For more information, refer to Form W-4V, Voluntary Withholding Request. Learn more about what the IRS has to say about unemployed insurance at this Web site: Topic 418 — Unemployment Compensation.