Updated: April 24, 2024

What is unemployment insurance and how does it work?

Published By:

Erin Ellison

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Unemployment benefits are payments that are made to employees who have lost their job through no fault of their own. The amount paid and the length of time an employee can collect unemployment benefits vary by state, but the goal is always the same: to help laid off employees bridge the financial gap between jobs. Rules for eligibility, applications, and benefits also vary significantly from state to state, so it’s important to be clear about local rules and requirements before applying.

How do you qualify for unemployment insurance?

As we mentioned, every state sets its own guidelines for unemployment insurance requirements. Typically, employees qualify when they:

  • Are unemployed through no fault of their own. In most states, this means they have to be separated from their last job due to a lack of available work — not because they were fired for cause or performance-related issues.
  • Meet work and wage requirements. Employees must meet their state’s minimum requirements for wages earned or time worked during an specific period of time, which is referred to as a “base period.” In most states, the minimum base period is usually the four out of the last five calendar quarters before a claim is filed.
  • Meet any additional state requirements. They can learn more about the details of their state’s program.

How do you apply for unemployment insurance?

To receive unemployment insurance benefits, terminated employees will need to file a claim with the unemployment insurance program in the state where they worked. Here’s where to start:

  • They should contact their state’s unemployment insurance program as soon as possible after becoming unemployed. If an employee worked in a state other than the one where they now live or if they worked in multiple states, the state unemployment insurance agency where they now live can provide information about how to file a claim with other states.
  • When filing a claim, they will be asked for certain information such as addresses and dates of prior employers. To make sure claims are not delayed, it’s important to give complete and correct information.
  • Depending on the state, claims may be filed in person, by telephone, or online.
  • It generally takes two to three weeks for a terminated employee to receive their first benefit check.


Once an application is accepted, terminated employees typically have to recertify their unemployment application weekly to maintain their benefits. This step typically requires them to state that they are available for employment and looking for employment, and it’s usually quickly done online or over the phone.

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What might disqualify you from unemployment insurance?

An employee can be disqualified from unemployment benefit eligibility in most states if he or she is fired for misconduct, willful behavior, or other justifiable “good cause” related to the employee’s on the job performance.


An employee is not usually eligible for unemployment if they voluntarily leave a job, unless they have good cause for leaving. When an employee quits their job, they can show good cause for things like:

  • A hostile work environment that wasn’t addressed
  • Lack of payment
  • Unsafe work conditions
  • A personal or medical condition or disability that prevents them from working
  • Domestic violence situations
  • Lack of state-standard child care during their hours of work
  • Caring for a sick family member or during a family crisis


Each of these varies by state, so it’s important to check with your state’s requirements.


If an applicant is denied unemployment benefits, the process to appeal the decision differs in each state. If possible, they should gather supporting documentation and any witnesses they need for an appeal, and continue filing for unemployment throughout the process. Timing is important: in some states, applicants are given as few as 10 days to file an appeal for denied benefits.

Where does the money for unemployment come from?

The U.S. Department of Labor’s Unemployment Insurance program is funded through collecting payroll taxes as part of the Federal Unemployment Tax Act (FUTA). Employers are required to pay FUTA taxes to the IRS, but unlike social security taxes, there is no employee contribution.


The standard FUTA tax rate is 6.0% on the first $7,000 of taxable wages per employee, which means that the maximum tax as an employer has to pay per employee for the 2024 tax year is $7,000 x 6% = $420


Once an employee makes $7,000 in gross wages for the year — that’s it. They no longer have to pay FUTA for that particular employee.


In addition, employers may also pay taxes according to their State Unemployment Tax Act (SUTA). In some states, unemployment taxes may also be called State Unemployment Insurance (SUI), Employment Security Tax (EST), or Reemployment tax. In most states, SUTA or SUI is only paid by the employer. However, employees in states such as Alaska, New Jersey, or Pennsylvania must also contribute to their state unemployment taxes. Employers in any of these states are required to withhold state unemployment tax from employees’ wages and remit them to the state.


Unemployment isn’t something employees or employers look forward to dealing with. We hope this guide has been helpful as you navigate the process. And if you’re an employer who is preparing to lay off an employee, you might also be interested in our guide to employee terminations.


This article is for informational purposes only and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for formal consultation.

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Erin Ellison is the former Content Marketing Manager for OnPay. She has more than 15 years of writing experience, is a former small business owner, and has managed payroll, scheduling, and HR for more than 75 employees. She lives and works in Atlanta.