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Unemployment compensation is money received by an unemployed worker from the United States or a state. In the United States, this compensation is classified as a type of social safety net. According to the Internal Revenue Code, these types of benefits are to be included in a taxpayer’s gross income.
Federal-State joint programs
Wisconsin originated the idea of unemployment insurance (UI) in the U.S. in 1932. In the United States, there are 50 state unemployment insurance programs plus one each in the District of Columbia and Puerto Rico. Through the Social Security Act of 1935, the Federal Government of the United States] effectively coerced the individual states into adopting unemployment insurance plans.
Unemployment insurance is a federal-state program jointly financed through federal and state employer payroll taxes (federal and state UI taxes). Generally, employers must pay both state and federal unemployment taxes if:
To facilitate this program, the U.S. Congress passed the Federal Unemployment Tax Act (FUTA), which authorizes the Internal Revenue Service (IRS) to collect an annual federal employer tax used to fund state workforce agencies. FUTA covers the costs of administering the Unemployment Insurance and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits. As originally established, the states paid the federal government.
The FUTA tax rate was originally three percent of taxable wages collected from employers who employed at least four employees, and employers could deduct up to 90 percent of the amount due if they paid taxes to a state to support a system of unemployment insurance which met Federal standards, but the rules have changed as follows. The FUTA tax rate is now 6.2 percent of taxable wages of employees who meet both the above and following criteria, and the taxable wage base is the first $7,000 paid in wages to each employee during a calendar year. Employers who pay the state unemployment tax on a timely basis receive an offset credit of up to 5.4 percent regardless of the rate of tax they pay their state. Therefore, the net FUTA tax rate is generally 0.8 percent (6.2 percent - 5.4 percent), for a maximum FUTA tax of $56.00 per employee, per year (.008 X $7,000 = $56.00). State law determines individual state unemployment insurance tax rates. In the United States, unemployment insurance tax rates use experience rating.
Within the above constraints, the individual states and territories raise their own contributions and run their own programs. The federal government sets broad guidelines for coverage and eligibility, but states vary in how they determine benefits and eligibility.
Federal rules are drawn by the Department of Labor's Employment and Training Administration. For most states, the maximum period for receiving benefits is 26 weeks. There is an extended benefit program (authorized through the Social Security Acts) that may be triggered by state economic conditions. Congress has often passed temporary programs to extend benefits during economic recessions.
The federal government lends money to the states for unemployment insurance when the states run short of funds. In general, this can happen when the unemployment rate is high. The need for loans can be exacerbated when a state cuts taxes and increases benefits. All loans must be repaid with interest.
Because it is a joint federal/state program run by the states, taxing business for the benefit of labor, the politics of unemployment insurance are very complex.
The Unemployment Insurance (UI) program helps counter economic fluctuations. When the economy grows, UI program revenue rises through increased tax revenues while UI program spending falls as fewer workers are unemployed. The effect of collecting more taxes than are spent dampens demand in the economy. This also creates a surplus of funds or a "cushion" of available funds for the UI program to draw upon during a recession. In a recession, UI tax revenue falls and UI program spending rises as more workers lose their jobs and receive UC benefits. The increased amount of UI payments to unemployed workers puts additional funds into the economy and dampens the effect of earnings losses.
Eligibility and amount
Certain American workers do not qualify for unemployment insurance. These includes part-time, temporary, and self-employed workers.
Generally, the worker must be unemployed through no fault of his/her own (generally through lay-offs). Unemployment benefits are based on reported, covered quarterly earnings. The amount of earnings and the number of quarters worked are used to determine the length and value of the unemployment benefit.
It generally takes two weeks for benefit payments to begin, the first being a "waiting week", which is not reimbursed, and the second being the time lag between eligibility for the program and the first benefit actually being paid.
To begin a claim, the unemployed worker must apply for benefits through a state unemployment agency. In certain instances, the employer initiates the process. Generally, the certification includes affected person affirming that they are "able and available for work", the amount of any part-time earnings they may have had, and whether they are actively seeking work. These certifications are usually accomplished either by internet or via an interactive voice response telephone call, but in a few states may be by mail. After receiving an application, the state will notify the individual if they qualify and the rate they will receive every week. The state will also review the reason for separation from employment. Many states require the individual to periodically certify that the conditions of the benefits are still met.
Each Thursday, the Department of Labor issues the Unemployment Insurance Weekly Claims Report. Its headline number is the seasonally adjusted estimate for the initial claims for unemployment for the previous week in the United States. This statistic, because of its timeliness, is an important indicator of the health of the labor market, and more broadly, the vigor of the overall economy. Numbers below 300,000 tend to indicate a tightening labor market whereas numbers above 400,000 are generally associated with increasing unemployment.
The argument for taxation of social welfare benefits is that they result in a realized gain for a taxpayer. The argument against taxation is that the benefits are generally less than the federal poverty level.
Unemployment compensation has been taxable by the federal government since 1987. Code Section 85 deemed unemployment compensation included in gross income. Federal taxes are not withheld from unemployment compensation at the time of payment unless requested by the recipient using Form W-4V.
In 2003, Rep. Philip English introduced legislation to repeal the taxation of unemployment compensation, but the legislation did not advance past committee. Most states with income tax consider unemployment compensation to be taxable.
Prior to 1987, unemployment compensation amounts were excluded from federal gross income.
For the US Federal tax year of 2009, as a result of the signing of the American Recovery and Reinvestment Act of 2009 signed by Barack Obama on February 17, 2009 the first $2,400 worth of unemployment income received during the 'tax year' of 2009 will be exempted from being considered as taxable income on the Federal level, when American taxpayers file their 2009 IRS tax return paperwork in early 2010.
Employers have the option of reducing work hours to part-time for many employees instead of laying off some of them and retaining only full-time workers. Employees in 18 states can then receive unemployment payments for the hours they are no longer working.
Articles and resources
- ↑ http://www.irs.gov/taxtopics/tc418.html "Tax Topics - Topic 418 Unemployment Compensation",] Internal Revenue Service
- ↑ 2.0 2.1 2.2 "State and Local Government," Joseph F. Zimmerman, 1970, Barnes & Noble
- ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 "U.S. Department of Labor, Employment & Training Administration, Unemployment Insurance Tax Topic
- ↑ http://www.npr.org/templates/story/story.php?storyId=99170822
- ↑ State Unemployment Benefits US Department of Labor
- ↑ State Unemployment Web (November 2008)
- ↑ http://www.dol.gov/opa/media/press/eta/ui/current.htm
- ↑ 8.0 8.1 8.2 8.3 "Taxation of Unemployment Benefits: Report for Congressional Research Service," Christine Scott, The Library of Congress, January 14, 2005
- ↑ http://www.govtrack.us/congress/bill.xpd?bill=h108-798 "H.R. 798 (108th): Unemployment Tax Repeal Act of 2003"
- ↑ "Revenue Ruling 71-425". Internal Revenue Service. Taxlinks.com.
- ↑ "Companies Implement Part-Time Layoffs", Curt Nickisch, Morning Edition, National Public Radio, 21 Aug 2008.