The Disadvantages of Collecting Unemployment

Young woman sitting at laptop on dining table
A young woman sitting at a dining table uses her laptop computer to file for unemployment. (Image: John Howard/Photodisc/Getty Images)

The U.S. unemployment insurance benefits program was founded in 1935 to help alleviate the devastating economic impacts of the Great Depression. The program continues today, buffering the impact of job layoffs and temporary losses of employment. Collecting unemployment helps those who are between jobs pay their bills and buy basic necessities, which also helps keep the economy moving. However, there are also disadvantages to collecting unemployment.

Seeking Work

In most states, to continue collecting unemployment you will need to actively seek work, either registering with a state job agency or submitting a certain number of job applications or resumes each week. You have to be prepared to accept any position offered to you that meets the basic parameters of your qualifications, according to Young Money. The disadvantage of this is that you must spend considerable time each week preparing and submitting job applications, even if there is nothing desirable in your area. Also, you must accept the first job prospect which presents itself, even if it precludes you from continuing to seek more desirable or lucrative work.

Self-Employment

Beginning preparation for starting your own business can disqualify you from receiving unemployment benefits, even if you are not yet receiving any income from your intended self-employment venture, according to the New York State Department of Labor. Time spent on evenings and weekends outside of normal working hours preparing to start a business, even before the first sale is made, is considered employment, the New York State Labor Department advises.

The disadvantage of this is compounded if job opportunities are limited, as starting up your own business may be the best option for income over time. However, you will have to either wait until your unemployment runs out, or risk losing unemployment benefits, even before beginning the planning stages of your own business.

Taxes

Unemployment benefits are fully taxable income, but federal tax law does not require state unemployment agencies to withhold taxes from your unemployment benefits check, according to the Washington State Employment Security Department. Unemployment recipients can choose to request that their state employment agency withhold federal income taxes from their checks; however, this may significantly reduce the amount of money available to the recipient, making the difficult time of unemployment even harder.

On the other hand, failure to have taxes withheld from the check could result in a large tax bill owed when federal taxes are filed, creating even greater economic hardship. Because unemployment benefits are only available for a finite period of time, unemployment benefits may run out, and no employment may yet be available when the tax bill comes due.

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