Being unemployed can be stressful, as unemployment insurance (UI) compensation generally covers only a portion of your lost income. This makes maintaining a budget a challenge that is compounded when you’re in the midst of an economic downturn like the COVID-19 pandemic has caused.
You might wonder if you have to pay back your unemployment benefits once you get back to work. We explore the answers and how UI benefits are funded below.
In most cases, the short answer is no: You don’t have to pay back unemployment insurance (UI) benefits directly. These benefits are backed by the trust funds employers pay into. In most states, only employers pay into the unemployment insurance trust funds. But in Alaska, New Jersey and Pennsylvania, employees pay a small percentage of their income to the company unemployment pool as a tax.
In some cases, there may be an error in your unemployment filing or another mistake by the filer or the unemployment office that results in an overpayment of unemployment benefits. While an overpayment isn’t common, it may result in you having to pay back some of the benefit payments.
If there is a mistake that resulted in you receiving more UI benefits than you’re entitled to, the state will eventually catch the error and request you pay it back. Errors that can result in an overpayment may include:
- A mistake on your application
- A mistake making a weekly UI benefits claim
- Failure to meet eligibility requirements
- A clerical issue at your state’s unemployment office
The unemployment insurance office will notify you of any overpayment via a letter. This letter will explain what led to you receiving too much in unemployment benefits, the amount you were overpaid, a deadline for you to respond and other important information.
You can respond to an overpayment notification by accepting the repayment or appealing it. When you accept the repayment, you’re telling the unemployment office that you agree you were overpaid and will repay the overpayment. In an appeal, you’ll go through a fact-finding interview and present evidence countering the allegation of overpayment.
If the notification mentions anything about knowingly falsifying records or something to that effect, it may be a more serious issue that ties into unemployment insurance fraud. If you receive a letter mentioning this, contact the unemployment department in your state as soon as possible to sort it out. Failure to address the issue can result in stiff fines or even jail time.
If the overpayment wasn’t due to unemployment insurance fraud, you may qualify for an overpayment waiver. These waivers are generally granted on a case-by-case basis. They’re typically granted if the overpayment wasn’t your fault, if requiring repayment is unfair or if repayment would run counter to the purpose of the UI benefits program according to the Department of Labor. There are no clearly defined rules in place for waiver approval, which puts a fair amount of subjectivity and uncertainty in the process.
If you were overpaid unemployment benefits, you should receive a letter notifying you of the issue and the amount you owe. The letter will present the option to pay the debt in full immediately or set up a payment plan.
You can call or visit your local unemployment office if you suspect you were overpaid but haven’t received a letter. The office will review your application and let you know if you’ve been overpaid or not.
If you continue receiving unemployment benefits after the overpayment, the state may deduct the full amount or agreed-upon payments from future unemployment checks.
If you should no longer receive unemployment insurance payments because you found a new job or otherwise became ineligible for benefits, you can also repay the overpayment directly to the state via a check or other approved means.
If you fail to repay the overpayment amount, the state may begin wage garnishment or take other legal routes to recover the overpayment. The state may also seize your state or federal income tax refund until you pay off the overpayment.
With the exception of the states that require employees to pay a small tax to fund UI benefits — Alaska, New Jersey and Pennsylvania — employers pay 100% of state and federal unemployment taxes.
In accordance with the Federal Unemployment Tax Act (FUTA), employers pay the federal government up to 6% of each employee’s first $7,000 of annual income. This helps maintain UI trust funds.
There is an exception to the FUTA payments though. In most cases, employers who pay state unemployment taxes on time are eligible for a FUTA credit or a reduced FUTA rate that is good for up to a 5.4% reduction. This reduction brings the effective FUTA rate down to as low as 0.6% of the first $7,000 of an employee’s income, which comes to a maximum of $42 per year per employee.
On top of the FUTA tax, there are also state unemployment taxes to cover unemployment compensation. These taxes vary by state and depend on the classification of the employer and whether the employer is new or established.
The new employer state unemployment insurance (SUI) tax rate is for newly registered, non-construction employers who haven’t received their employer classification yet. The new employer SUI tax rates range from 0.55% in South Carolina to 3.689% in Pennsylvania. For non-construction, established employers with an employer classification, the SUI tax rate ranges from 0% in a handful of states to 14.37% in Massachusetts.
Like the FUTA tax, the SUI tax rate only applies to a portion of an employee’s annual income, but it must at least match the initial $7,000 an employee earns with a company (which is what the FUTA tax is based on). The 2020 wage bases for SUI taxes vary by state and range from the first $7,000 of an employee’s wages in Tennessee, California, Arkansas and Arizona to the first $52,700 in Washington.
If a state exhausts its unemployment funds, it can borrow from the federal government. However, the state must repay the debt in two to three years. If the debt remains unpaid beyond the agreed-upon payoff date, the FUTA credit is reduced, resulting in employers paying higher unemployment insurance taxes until the loan is paid off.
During times of economic recession, when job loss increases and unemployment claims rise, the federal government may step in to fund additional unemployment benefits.
The COVID-19 pandemic, for example, brought about the passing of the CARES Act. This act extended unemployment benefit payments by 13 weeks, added $600 to the weekly benefit amount through July 31, 2020, and extended UI benefits to part-time employees, gig workers and freelancers. The federal government funded 100% of the CARES Act.
To summarize, you only pay back your unemployment benefits in cases of overpayment.
Additionally, the federal and state governments rely mostly on employers to fund UI benefits. The only time you’re required to help fund them is if you live in a state that requires employers to deduct a small portion of the UI tax from your paycheck. Even then, the amount you pay will be small, and you will only pay if you’re employed.
Even in times of dramatic economic downturn that result in enhanced UI benefits, like the coronavirus pandemic, you typically do not repay the unemployment benefits you receive.
The only time you must repay benefits is if your weekly benefit amount was higher than what you were eligible to receive. At that point, the state unemployment department will ask you to repay the overpaid UI benefits or deduct them from ongoing unemployment payments.
Getting a new job doesn’t usually mean you need to repay your weekly benefit amount. With that in mind, you can worry less and focus your energy on finding that new job.