Millions of people receive unemployment benefits yearly, but not everyone understands how they work. And it’s a complicated issue. Each state has its own policies and eligibility requirements. However, most people will not have to pay back unemployment money.
Hot take: It’s unlikely that you’ll have to pay back unemployment, even if you find a new job. However, there are a few exceptions. For example, if you were paid too much in benefits, your employer successfully appeals your unemployment claim or fraud. You also may have to pay state or federal income taxes on your unemployment benefits.
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Four Reasons You Might Have to Repay Unemployment
Very few people have to pay back their unemployment benefits. This is true even for people who were unemployed but have recently found a new job.
In rare cases, a recipient might have to pay back some of the money they’ve received. This happens for the following reasons
- Overpayment: Benefit overpayment can occur for several reasons, including an application error or a mistake the state makes during processing. If this occurs, the state might send out letters requesting the overpaid amount back. These are called a notice of overpayment. It should include the amount of the overpayment.:
- Employer appeal: A previous employer might appeal to have the money returned, thus requiring the recipient to repay the benefits.
- Federal taxes: The federal government considers unemployment insurance benefits taxable income, meaning you must report them on your federal tax return. Depending on where you live, you might also have to pay a state income tax.
- Fraud: It’s considered fraud to Intentionally withhold or provide inaccurate information. Possible fraud causes include working while still collecting unemployment benefits or collecting benefits without actively seeking a job. Any fraudulent payments are subject to a penalty and could result in criminal prosecution.
Overpayment
Unemployment overpayment happens when an individual receives larger benefit payments than they should have. When this happens, that person typically has to pay back the extra amount.
Benefit overpayment can occur for various reasons, ranging from a simple error to fraud. Oftentimes, it happens through no fault of your own.
Depending on your state, your unemployment benefits could be reduced by 50% for non-fraud-related overpayments and 100% for fraud-related overpayments. This reduced amount will be applied to an overpayment balance.
Initially, there was no way to waive repayment for overpaid benefits, even if they were not your fault. However, the Continued Assistance for Unemployed Workers Act makes it possible for states to waive repayment.
Pro tip: If overpaid, the state unemployment insurance office would send you a letter or notice. This overpayment determination letter will indicate which weeks you were overpaid, by how much, the laws related to overpayment, and why it occurred. It will also give you a deadline for responding.
If you’ve received an overpayment through no fault of your own, you can submit an overpayment waiver. If that doesn’t work, you can set up a repayment plan.
Common errors that result in overpayment include:
- A mistake in the weekly UI benefits claim
- General application error
- Failing to meet eligibility requirements
- Clerical mistake on the agency’s end
Do I Qualify for an Overpayment Waiver?
According to the U.S. Department of Labor, an overpayment waiver is a “non-fraud overpayment for which the state agency, in accordance with state law, officially relinquishes the obligation of the claimant to repay.”
However, if the overpayment was not due to your actions, the state will recognize that. Oftentimes, they won’t require repayment since it would hurt your financial situation.
Employer Appeals
Your employer can appeal an unemployment claim if they don’t believe you should be eligible to receive benefits.
Each state determines specific unemployment eligibility, but you can generally claim benefits unless you quit, were fired for cause or were considered an independent contractor.
Pro tip: There are a few reasons you might be disqualified. These include workplace misconduct, misconduct outside of work, turning down an acceptable job opportunity, failure to look for another job, failing a drug test, being unable to return to work, receiving severance pay (but only until the severance payments run out), earning money as a freelance worker or fraud.
You also have the right to appeal with your state unemployment office if your claim is denied.
If your unemployment application is approved but overturned by appeal, you will likely have to repay any money you’ve already received.
Taxes
Unemployment benefits are taxable and must be reported on federal income tax returns. The amount of money you must pay depends on your taxable income and tax bracket.
The average weekly benefit amount is $978, which could bump you into a higher tax bracket. This means you might end up owing more in taxes than you anticipated, so be prepared for that. You may be able to file for an exemption if you’re experiencing financial hardship. The IRS is also often willing to work out a payment plan.
Pro tip: You should receive a copy of IRS Form 1099-G, Certain Government Payments, showing the money you were paid during the previous year.
State taxes are a bit more complicated unless you live in a state with no income tax. In this case, you won’t be taxed at the state level. States with income taxes treat unemployment differently. For example, benefits are exempt in California but taxable in Michigan.
If you’re unsure, please consult a tax professional for guidance.
Fraud
Unemployment insurance fraud occurs when an individual receives an overpayment of benefits due to:
- Intentionally withholding information
- Continuing to receive benefits after returning to work
- Providing false information in their benefits application
- Not reporting earnings or reporting false amounts
- Failing to report any bonuses, severance pay, or other forms of payment.
- Not looking for a new job or claiming to search without actually doing so
Unemployment insurance fraud can also occur through identity theft, which is not the victim’s fault.
Unemployment insurance fraud can have serious financial ramifications. Large-scale fraud, or receiving over $400 in fraudulent benefits, could also result in wage garnishment, legal action or ineligibility for future unemployment benefits.
Again, rules vary from state to state. Additionally, if you’ve missed a deadline to validate eligibility claims, you might be ineligible for benefits.
How to Pay Back Overpaid Benefits
If the state determines you were overpaid, it will typically send a notice requesting the surplus back. If you’re currently collecting unemployment benefits and don’t request a waiver, the state could deduct what you owe from future unemployment checks.
If you’ve received a notice by mistake, submit an appeal and request a hearing as soon as possible. You could qualify for a waiver or payment forgiveness depending on the case.
Some states let you pay by credit or debit card, money order, or check. Others will garnish your state or federal income tax refund or lottery winnings to cover your debts. In extreme cases, a state might pursue civil action in court to collect payment.
How Unemployment Benefits Work
Unemployment benefits, or unemployment insurance, is a state-federal program funded by unemployment taxes under the Federal Unemployment Tax Act (FUTA).
Under this federal law, most employers are required to pay both federal and state unemployment taxes to the IRS each year. These taxes fund state workforce organizations.
Pro tip: If you’re an employee, these taxes are not deducted from your wages unless you’re a resident of Alaska, New Jersey or Pennsylvania. Employers must withhold state unemployment tax from employees’ paychecks in those states.
If you’re unsure about your state’s specific policies or requirements for unemployment insurance, here’s a list of every state’s contact information.
How Unemployment Payments Work
The government established the federal-state unemployment insurance program in the 1930s during the Great Depression.
Every state has its benefits and has its requirements or limitations. However, most states offer up to 26 weeks of unemployment benefits to those who qualify. These benefits can replace anywhere from 30% to 50% of the unemployed worker’s previous income.
During major economic downturns, the unemployment program is especially useful for keeping people afloat financially. It also helps combat the severity of an economic recession.
How Long Do Unemployment Benefits Last?
In most cases, benefits last up to 26 weeks. However, some states offer benefits for either a longer or shorter period. For example:
- Massachusetts: 30 weeks
- Montana: 28 weeks
- Michigan, Missouri, South Carolina, and Idaho: 20 weeks
- Arkansas and Kansas: 16 weeks
- Georgia and Alabama: 14 weeks
- North Carolina and Florida: 12 weeks
State benefits also vary based on certain factors, including:
- The current unemployment rate in the state
- An individual’s earnings history
- Date filed for benefits
- Whether there’s an emergency or extended federal benefits program in place
How to Apply
First, file a claim with the unemployment program in the state where you were most recently employed. It’s best to do this as soon as possible, as the process can be lengthy.
On average, receiving the first payment from the date you filed the unemployment claim takes two to three weeks. However, if there’s a problem with your application, processing can take much longer.
To prevent delays, have your documents ready when you file. Be prepared to provide your Social Security number, bank account information and employment history.
Sometimes, an employer will file for unemployment benefits on behalf of their staff. This usually only happens if a person is still technically employed but is temporarily laid off due to insufficient work.
Applying for benefits is a little trickier if you move out of state. However, you can contact your current state department to see what you can do. Check with the Department of Labor for a map and list of contact information for each state.
The Bottom Line
You typically don’t have to pay back unemployment benefits unless you’ve received an overpayment. Even then, you might be able to request a waiver if the overpayment is not due to your actions.
Remember, though, that you will need to report any payments on your federal tax return. This is because unemployment benefits are considered taxable income. If your state also has a state income tax, you might have to pay that, too.
FAQs
In 2020, around 40 million Americans received some form of UI benefits. In response to the COVID-19 pandemic, the CARES Act established the following programs:
Pandemic Unemployment Assistance (PUA): This program provided financial aid to those who couldn’t work due to the pandemic. Unemployed individuals received up to 39 weeks of benefits. Even those not previously eligible for aid, such as gig workers, independent contractors, and freelancers, could receive aid. PUA was in effect from January 27, 2020, to December 31, 2020.
Federal Pandemic Unemployment Compensation (FPUC): FPUC provided an additional $600 each week to eligible individuals. Though these benefits are no longer active, they could be used in conjunction with PUA and state UI benefits.
Pandemic Emergency Unemployment Compensation (PEUC): This program offered 13 more weeks of UI benefits for a total of 39 weeks. Only those who were eligible for standard benefits could qualify. The program ended in September 2021.
Any money from these programs is taxable and must be reported to the IRS.
Disaster Unemployment Assistance is another program that provides unemployment benefits to those who lost their job due to a presidentially declared major disaster. To qualify, you must:
Prove the job no longer exists or you cannot reach it, thus making you unable to work.
Have evidence of a disaster-related injury you’ve received that prevents you from working.
Be the new head of household after the previous one died in the disaster.
This depends on the nonprofit.
Nonprofits registered as 501(c)(3) organizations are typically exempt from paying state unemployment taxes.
For instance, a nonprofit with no more than four employees who work a maximum of 20 weeks during the year don’t have to pay into the system. If the organization chooses not to pay unemployment insurance taxes, its employees will not be able to receive unemployment benefits. Unfortunately, this is true even if the company laid off the employee.
On the other hand, most nonprofits do pay state unemployment taxes, just like any for-profit business. In this case, employees could be eligible for benefits.
Some states consider nonprofit employees eligible for benefits, even if the organization doesn’t pay unemployment taxes. However, this depends on the state’s criteria.
There’s currently no limit to the number of claims you can file. When you file for the first time, you’ll receive information regarding how many weeks of benefits you’ll get. Once that date passes, you can apply again or ask for an extension. As long as you’re still eligible, you can do this at the start of each new benefits year.