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The Color of Money: For the Fortunate, Consider What You Can Afford Before Filing for Unemployment

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By Michelle Singletary
Thursday, August 6, 2009

During a recent online discussion, an interesting debate developed over a chat participant's comment about not taking unemployment benefits.

The participant wrote: "Last year my husband got laid off and was out of work for four months. We had an emergency fund and made it through without taking unemployment, and without going into debt, not even one cent!"

Several people got a bit testy. Here's what some wrote:

-- "It's okay to take unemployment: It's more than just okay. If one is unemployed and eligible for unemployment insurance, it's downright financially reckless not to take it. Unless one has money to burn, of course."

-- "What's great about not taking unemployment when you lose your job? That's what you've been paying into it for: It's an insurance program, not welfare. You're smart not to spend it if you don't have to, but why deplete your savings rather than take it?"

It was clear from the responses I received that many people don't understand how unemployment insurance works and who pays for it.

I applauded the couple for relying on their own resources: It's why you establish an emergency fund. However, if you need unemployment compensation, by all means take it. But also recognize this isn't "free money."

The money for the weekly checks paid out to the millions of people out of work through no fault of their own is raised through state and federal unemployment insurance taxes on employers. With the exception of a few states -- New Jersey, Pennsylvania and Alaska -- workers do not contribute directly to the program. According to the Government Accountability Office, which has looked at the funding of unemployment insurance, the program was established in 1935 for two primary reasons: to give workers temporary financial help during unemployment; and to help stabilize the nation's economy in economic downturns by maintaining workers' purchasing power.

Each state oversees its own unemployment insurance program following federal guidelines. The federal government pays for the administrative costs to the states of running the program. The Federal Unemployment Tax Act imposes a payroll tax on employers based on the wages they pay to their employees.

State unemployment tax rates vary from state to state. The federal tax is imposed at a single flat rate on the first $7,000 of wages that a company pays for each employee. For 2009, the federal rate is 6.2 percent. Businesses that pay state unemployment taxes can generally claim credits to lower that federal rate to as little as 0.8 percent.


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© 2009 The Washington Post Company

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