It is no secret that the COVID-19 epidemic has absolutely crushed the U.S. job market, with more than 36 million American workers filing for unemployment benefits over the last several weeks. The unprecedented shock to the economy has affected almost half of U.S. households who have lost employment income or are earning reduced wages.
While the freelance economy has also been affected by the ripple effects of the COVID-19 epidemic, it is proving to be a valuable lifeline for many. In fact, some economists expect even more opportunities for freelancers as employers embrace the new “work-from-home” paradigm ushered in by the coronavirus pandemic. For newly laid-off workers dipping their toes into the freelancing pool, it begs the question: Can you collect unemployment while earning freelance income?
The short answer is “yes,” but the details vary from state to state.
Typically, if you receive income from freelancing or gig work while collecting unemployment, then your benefits will end up getting reduced. Before diving into more details, here are some other questions about freelancing and unemployment benefits that you may want answers to:
How Do Unemployment Benefits Work in General?
Unemployment benefits are administered at the state level, so you’ll need to contact the unemployment insurance office in your state to apply.
Rules vary from state to state, but generally you qualify for unemployment benefits if you lost your job through no fault of your own and were employed for a certain period of time. You’ll also have to seek new employment, and each state has rules to follow when it comes to reporting job-seeking activity.
Can I File for Unemployment Benefits If I Am a Freelancer?
Under normal circumstances freelancers wouldn’t be eligible for unemployment benefits. However, in response to the COVID-19 crisis, Congress passed the CARES Act which includes a provision allowing states to extend special Pandemic Unemployment Benefits to self-employed individuals through July 2020.
That means freelancers are temporarily eligible to receive unemployment benefits, so long as they can document their income. Check with your state unemployment offices for more information on how to apply.
How Will Continuing to Freelance Affect My Unemployment Benefits?
You can continue to freelance while you receive benefits, but it will reduce the amount of unemployment you receive.
The amount that your unemployment benefits are reduced depends on how much additional income you make and your state’s formula for calculating what is called the “partial benefit amount.” Each state has a different threshold, for example 30 percent of your unemployment benefits, that you can earn before your benefits are reduced. Any amount you earn over the threshold will generally be deducted from your unemployment check.
If your freelance earnings exceed the amount of your unemployment benefits, then you will no longer be eligible for benefits—including the extra $600 of assistance extended by the U.S. government in the CARES Act (through July). You may also disqualify yourself if you accept a part-time job and quit, as you would no longer be involuntarily out of work.
Do I Have to Pay Taxes on My Unemployment Benefits? What About Freelance Earnings?
Yes to both.
Unemployment benefits are considered taxable income, so they will be considered when determining your income federal income tax liability next year. That also includes the extra $600 weekly benefit provided by the U.S. government. Your employer takes money out of your paycheck for taxes automatically, but with unemployment benefits you have to opt-in to have taxes deducted. Choosing to have taxes taken from your unemployment check is a good idea so you don’t get caught off guard when you file for taxes.
As for any money you make freelancing, be aware that not only is it taxable income but you will also owe self-employment taxes on your earnings.
Should I Freelance While Earning Unemployment Benefits?
That depends on your situation, and how much you stand to make freelancing.
For example, you don’t want to earn more than you receive from your state unemployment benefits because you might lose eligibility—and the extra $600 a week provided by the CARES Act. Unless you are sure you are going to make up that additional $2,400 a month freelancing, you certainly want to be careful not to go over any threshold that would disqualify you.
Every state is different, so always check to make sure if any kind of freelance activity will disqualify you. For example, some states have different rules about being available for work or starting a business that could potentially make you ineligible for benefits.
However, if you are sure you won’t run afoul of your state’s rules by freelancing then there is no reason you can’t dabble. In fact, your freelance experience might help you pad out your resume or lead you to full-time employment. If you are curious about freelancing for extra income, consider joining Fiverr and start attracting clients pronto.