Due to the recent coronavirus pandemic, many businesses and individuals are facing challenging times — including those that are self-employed. The government has issued unemployment insurance for self-employed individuals to help them manage their finances.
- What is unemployment insurance?
- Are unemployment insurance payments taxable?
- How do you know if you qualify for unemployment insurance benefits?
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
In the midst of recent economic hardship, the federal government has bolstered the financial assistance offered to businesses and improved the benefits of unemployment insurance for self-employed individuals. If you're self-employed and wondering what aid you qualify for, we'll help guide you through the process and what you need to know.
What is unemployment insurance?
Unemployment insurance is a government program that provides financial assistance to those who are out of work through no fault of their own. When people say they're "collecting unemployment," they're really referring to collecting unemployment insurance benefit payments.
This program is funded by employers along with the federal and state governments, with the federal authorities setting the program's general guidelines. However, state governments are typically in charge of administering the program. This allows states to decide additional eligibility requirements and to set their own restrictions on how much and for how long residents can receive their benefits.
In general, states review an employee's earnings over the past several weeks and calculate each person's benefit amount based on a percentage of the average earnings.
For example, if your state's benefit rate is 47%, then your state might
- average your weekly wage from the past 52 weeks and then
- calculate a weekly benefit to you based on 47% of that average.
At this rate,
- if your average wage for the past 52 weeks is $650 per week, then
- you would receive $305.50 per week in unemployment insurance during each week that you remain eligible for the benefit.
Are unemployment insurance payments taxable?
Typically, yes. You'll report your income from unemployment insurance on your income tax return. That amount will be subject to federal income taxes and state income taxes for some states. When setting up your benefit checks with your state, you may choose to have taxes withheld from your payment. For 2020, up to $10,200 of unemployment benefits per person can be excluded from income provided certain income requirements are met.
How do you know if you qualify for unemployment insurance benefits?
There are three main eligibility requirements for unemployment insurance benefits.
The first is that you're "unemployed through no fault of your own" as defined by the law in your state. This typically means that you didn't quit your job but rather that you lost your job because of a lack of available work.
- There are some exceptions to this.
- Check with your state's unemployment office on the specific details for your state.
The second main eligibility requirement is that you have earned a minimum amount of wages and worked for a minimum amount of time at your job. Whether or not you have maintained employment for consecutive quarters in the previous year might also play a part in this.
- Each state sets these minimums.
- All states look at your recent work history and earnings during the previous year. They typically call this your "base period."
The third main eligibility requirement in most states is that you're able and available to work and are actively seeking employment. In most places, this means you must engage in a good faith search for employment.
- States often set a number of how many searches and employment contacts you must complete per week.
- Additionally, if you're offered suitable employment, you must accept it.
- You'll also need to continuously file weekly or biweekly claims to maintain your eligibility.
Are there changes to unemployment insurance benefits for self-employed individuals due to the pandemic?
Yes. The Coronavirus Aid, Relief and Economic Security (CARES) Act included Pandemic Unemployment Assistance (PUA) that allows for benefits to some workers who typically wouldn't qualify for unemployment insurance. Self-employed workers may qualify under PUA, including
- delivery drivers,
- independent contractors and
- other "gig" workers whose income has been cut or eliminated due to the pandemic.
If you're in this group, you can claim up to 39 weeks of benefits, and those benefits are available retroactively beginning with any weeks of unemployment on or after January 27, 2020.
- As with typical unemployment insurance, how much you'll receive varies by state.
- Unemployment insurance benefits for self-employed individuals was set to expire on December 31, 2020, but many of these benefits were continued until September 2021.
Additionally, under the CARES Act, the Pandemic Emergency Unemployment Compensation (PUEC) program allows states to extend unemployment benefits. This legislation also provides flexibility to states in determining what is considered "actively seeking work." You don't have to meet the same requirements to qualify if you're unable to search for work because of:
- restrictions, or
- illness due to the pandemic
Can you qualify for unemployment benefits if you've been furloughed?
During normal times, furloughed workers often don't qualify for unemployment insurance. However, if you were furloughed because of the coronavirus, you likely qualify for unemployment benefits through the CARES Act.
How do you apply for unemployment benefits?
Unemployment benefits are requested through the same state agencies as before the pandemic. In most states, the application is simple and can be completed online, over the phone or in person.
Unemployment benefits can be a great help to those currently out of work. If you're self-employed and needing assistance, there's no harm in applying for this government-funded relief.
TurboTax is here to help you navigate the different COVID-19 relief programs that you might be eligible for. Get up to date information, tax advice and tools to help you understand what coronavirus relief means to you empowering you to get more money in your pocket in this time of need at our Self-Employed and Small Business Coronavirus Relief Center.