How unemployment works

The word “unemployed” has many definitions, but I’ll focus on three of them. One: the layperson believes someone is unemployed if they are not working. Two: the data analyst or survey taker considers a person unemployed if they are not working but have been actively seeking work for some specified amount of time. And three: the unemployment insurance system provides short-term financial assistance for eligible unemployed persons.

Unemployment benefits are not the same as “welfare.” A person’s current financial condition and family situation does not sufficiently determine eligibility. Instead, unemployment is an insurance system, and some people pay in so some (other) people can get payouts.

The system is a joint state-federal program administered by the states. The state (generally) determines eligibility, benefit amounts, and the tax rate (like an insurance premium) that must be paid into the system. Some states are more generous than others.

Now, who pays the insurance premia? Employers. As a business owner with employees, I pay a percentage of payroll into the unemployment insurance system. By paying into the system, I’m doing my part to make sure that if my employees get laid off (lose their jobs through no fault of their own) they will have some assistance while they look for other work or while they wait for recall to my company.

Some companies hire employees, some hire independent contractors (ICs). I’m not going to get into all of the differences now, but employers who hire only ICs have not done their workers any favors for this current pandemic. See, no one pays unemployment insurance for ICs. An IC who applies for benefits wants something for nothing. If you work for someone who pays you with checks and you get a 1099 for taxes, they haven’t paid into unemployment on your behalf.

If you work for yourself, and just cash checks as they come to you, without paying UI taxes, you have not paid into the system. When applying for benefits, you are asking something for nothing.

Of course, COVID-19 has flung us into a truly unusual situation. Many self-employed people are unable to earn money from work through no fault of their own. And this is where the CARES Act comes in. We needed a special appropriation in order to pay benefits yo people who have not paid into the system.

FWIW, I am an employee of my corporation and pay payroll taxes and UI taxes on my wages, just as I do for all of my employees. Frankly, it’s the right thing to do, and there are a lot of business owners out there who choose to pay themselves and others as ICs when they could be employees. And why do it that way? To avoid paying payroll taxes, workers comp insurance, and UI taxes. To avoid contributing to the safety net that so many Americans need right now.

For example, if I pay an employee $15 per hour, I pay an additional $1.15 for Social Security and Medicare, $1.97 for liability and worker’s compensation insurance, and $0.38 into the unemployment system. I also pay for a payroll service and I offer benefits like paid sick leave and professional development funds. So every $15 hourly wage costs me about $20. Lots of employers choose not to pay that. For shame.

Do you have questions about unemployment? Feel free to ask me, I’ll do my best to answer.

Author: Tattooed Economist

{seeker, student, teacher, explorer, warrior, companion} My first career was economics professor, specializing in labor, econometrics, and education. I now run Eating for the Ecosystem, Inc. whose predominately-female crews offer landscaping and tree services. Before you ask, most economists are assholes, but most plants are not.

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