In the midst of staggering unemployment and poverty during the United States’ Great Depression arose a New Deal and new legislation aimed at bolstering a battered and torn economy. The Social Security Act of 1935 created a safety net for Americans who needed financial assistance for unemployment, disability, retirement, and other life situations where they may find themselves without an income through no fault of their own.
In 1939, the Federal Unemployment Tax Act (FUTA) set the unemployment compensation-related provisions of the Social Security Act into motion, creating a joint state-federal program of unemployment insurance. According to the U.S. Department of Labor, FUTA authorizes the Internal Revenue Service (IRS) to collect a federal employer tax in order to fund state workforce agencies. Today, unemployment insurance remains an important cushion for laid-off workers and helps to stimulate the economy during recessionary periods.
How Unemployment Insurance is Funded
Contrary to popular belief, unemployment insurance is not funded by individual taxpayer dollars. Rather it is funded by the employer who, pursuant to FUTA, is mandated by the IRS to pay a certain percentage of taxable wages in state and federal unemployment taxes.
In turn, the unemployment taxes collected by the IRS go toward funding state unemployment insurance and workforce programs. Ultimately, the unemployment insurance program accomplishes its goal when laid-off workers are able to file for and receive unemployment benefits from their state of residence.
Is Unemployment Taxes an Undue Burden on Employers and Small Businesses?
Companies universally agree that hiring and keeping employees in today’s world is expensive. So is the FUTA mandate for employers to pay state and federal unemployment tax placing an undue burden on American businesses?
In point of fact, the annual cost of unemployment insurance to employers is relatively low. Employers who consistently pay the state unemployment tax are eligible for an offset credit of up to 5.4 percent, independent of the tax rate they pay to the state.
According to the small business resource website, Business Owners Toolkit, the FUTA tax rate is 6.2 percent of taxable wages (wage base is the first $7,000 paid in wages to the employee during the year). After the offset credit is applied, the net FUTA tax rate is lowered to 0.8 percent for a maximum FUTA tax of $56.00 per employee on an annual basis.
How Unemployed Person File for Unemployment Benefits
On the receiving end of all the complicated tax code is the laid-off worker who files for unemployment benefits. The idea behind this financial cushion is to provide a source of income to bridge the gap until the person is once again gainfully employed.
Unemployment benefits also serve as an economic stimulus to keep people spending on the economy. Unemployment benefits may be paid for up to 26 weeks (6-1/2 months) and may be extended in times of severe economic recession as we see today. People may file for unemployment benefits through the web, by phone, or in person.
In summary, employers pay the IRS a sum of money for each employee in the case of layoffs. This money gets paid back to the employee when he or she files for unemployment benefits. It is for this very reason that every person who is laid off should take advantage of unemployment benefits. After all, the money has been set aside for them for this very situation.
Reasons to Take out Unemployment Cover
The purpose of unemployment insurance is to provide an income in the event of involuntary unemployment. This helps with paying bills, such as: mortgage payments, energy bills and general household bills. The absence of an income from redundancy insurance would almost certainly create financial issues.
Unemployment Insurance Helps to Cover Household Bills
If made involuntarily redundant, how would that person manage to pay household bills, such as: mortgages payments, food costs and utility bills? State benefits aren’t sufficient for paying bills and covering expenses, especially for homeowners who are given less financial protection than tenants.
After as little as 30 days, unemployment insurance pays out a tax-free income of 50 to 50% of previous earnings for up to 12 months. This can be used to cover household bills and gives a person that has been made involuntarily redundant sufficient time to find a suitable job.
Claim More than Once under an Unemployment Insurance Policy
If someone is made involuntarily redundant, it is still possible to make a claim under the same unemployment insurance policy later on. This is provided that the insured continues to make their premium payments and complies with the T&Cs of the policy.
Redundancy Insurance Helps People Feel More at Ease
In an uncertain world, unemployment insurance provides real peace-of-mind for the insured. Unemployment cover is particularly important for those with a young family or a mortgage to pay. With levels of home repossession on the increase, help with mortgage payments is essential.
Reduction in the Number of Companies Offering Unemployment Cover
The current recession has meant that the risk of involuntary redundancy is the highest it has been in decades. Emma Walker, of price comparison website MoneySupermarket.com, stated “Many of the biggest suppliers of unemployment cover have withdrawn their policies from the market recently.”
Whilst it is certainly harder to find a source of unemployment insurance than it was 12 months ago, it serves to illustrate how worthwhile the cover actually is. Why else would it be withdrawn? Use a broker or price comparison service to identify the few sources of unemployment cover that are now available.
Whilst unemployment insurance can be a real life-saver when involuntary unemployment raises its ugly head, there are certain pitfalls to be aware of. Those that are working part-time, on a contract, above 64 or haven’t completed their probationary period won’t qualify for unemployment cover. Beware of unscrupulous sellers as none of these groups stand to benefit.
Those with young families or mortgages should also consider income protection insurance or mortgage insurance in the event of ill health or involuntary redundancy. People that are concerned about the future may also be interested in saving for uncertainty by starting a cash ISA.
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