Understanding Unemployment Benefits Under the CARES Act: A Complete Guide

When the COVID-19 pandemic disrupted the economy in 2020, millions of Americans suddenly found themselves unemployed—including many who had never qualified for unemployment benefits before. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) fundamentally changed how unemployment insurance worked, expanding coverage to self-employed workers, gig workers, and independent contractors for the first time in history.

While the CARES Act unemployment programs have since expired, understanding how they worked provides valuable context for current unemployment benefits and potential future emergency programs. This guide breaks down what the CARES Act did, who it helped, and what lessons remain relevant today.

What the CARES Act Changed About Unemployment

Before the CARES Act, traditional unemployment insurance only covered W-2 employees who lost their jobs through no fault of their own. Self-employed individuals, independent contractors, and gig workers were typically ineligible because they didn't have employers paying into state unemployment insurance funds on their behalf.

The CARES Act introduced three major changes to unemployment benefits that lasted through 2020 and 2021:

1. Enhanced Weekly Payments (Federal Pandemic Unemployment Compensation)

The FPUC provision added an extra $600 per week on top of regular state unemployment benefits during the initial phase of the pandemic (March-July 2020). This was later reduced to $300 per week and extended through March 2021.

This enhancement recognized that many workers faced unprecedented challenges during lockdowns and economic shutdowns. The additional funds helped cover basic expenses when jobs disappeared overnight.

2. Extended Benefit Duration (Pandemic Emergency Unemployment Compensation)

Standard unemployment insurance typically provides 26 weeks of benefits in most states. The CARES Act initially added 13 extra weeks through the PEUC provision, later extending to 24 additional weeks.

This extension acknowledged that the pandemic created longer-than-usual job searches. Industries like hospitality, entertainment, and retail faced prolonged closures, making it difficult for workers to find new positions quickly.

3. Coverage for Self-Employed Workers (Pandemic Unemployment Assistance)

The most revolutionary change was the PUA program, which extended unemployment benefits to:

• Self-employed individuals and sole proprietors
• Independent contractors and gig workers
• Part-time workers
• Workers with limited work history
• Workers who had exhausted regular unemployment benefits

For the first time, someone driving for Uber, freelancing, or running a small consulting business could qualify for unemployment assistance if they lost work due to COVID-19.

Who Qualified for CARES Act Unemployment Benefits

Eligibility for the expanded unemployment programs depended on several factors:

Traditional Unemployment Insurance Recipients

Anyone already eligible for regular state unemployment benefits automatically received the federal enhancements. This included:

• Employees laid off or furloughed due to business closures
• Workers whose hours were significantly reduced
• Employees who lost jobs due to COVID-19 related business downturns

Pandemic Unemployment Assistance Recipients

The PUA program covered individuals who:

• Were self-employed or independent contractors
• Lost work directly due to COVID-19 (personal illness, caring for sick family members, school closures affecting childcare)
• Had COVID-19 related reasons they couldn't continue working
• Didn't qualify for regular unemployment benefits

Important note: General business downturns or slow periods didn't automatically qualify self-employed workers for PUA. The unemployment had to be directly linked to COVID-19.

How to Apply for Unemployment Benefits (Then and Now)

While CARES Act programs have ended, the application process for regular unemployment benefits remains similar across states:

Step 1: Gather Required Documentation

Before applying, collect:

• Social Security number and proof of citizenship or work authorization
• Detailed employment history for the last 18 months (employer names, addresses, dates of employment)
• Reason for job separation
• Proof of income (W-2 forms for employees, 1099 forms and Schedule C for self-employed)

Step 2: Apply Through Your State's System

Each state administers its own unemployment insurance program. You can typically apply:

• Online through your state's Department of Labor website (fastest method)
• By phone
• By mail or fax (slowest method)

Step 3: File Weekly or Biweekly Claims

After your initial claim is approved, you must continue certifying your eligibility every week or every two weeks, depending on your state's requirements. This typically involves:

• Confirming you're still unemployed or underemployed
• Reporting any income earned during the period
• Verifying you're actively seeking work (requirements vary by state)

Step 4: Track Your Application

Processing times vary by state, but you can generally expect your first payment 2-3 weeks after filing a complete claim. During high-volume periods, delays may be longer.

Common Mistakes to Avoid When Claiming Unemployment

Mistake #1: Incomplete or Inaccurate Information

Missing details or errors in your application can delay processing significantly. Double-check:

• Social Security numbers
• Employment dates and addresses
• Income amounts
• Contact information

Mistake #2: Not Reporting All Income

You must report any income earned while receiving unemployment benefits, including:

• Freelance or gig work
• Part-time employment
• Severance pay (rules vary by state)
• Pension payments

Failing to report income can result in overpayments that you'll have to repay, plus potential penalties.

Mistake #3: Missing Certification Deadlines

If you don't file your weekly or biweekly certification on time, you may lose benefits for that period. Set reminders and file promptly.

Mistake #4: Quitting Your Job Without Good Cause

Voluntary resignation typically disqualifies you from unemployment benefits unless you had "good cause" (definitions vary by state but may include unsafe working conditions, harassment, or significant changes to your job duties or compensation).

How Unemployment Benefits Interact with Business Assistance

During the CARES Act era, business owners faced complex decisions about layoffs versus keeping employees on payroll, especially when considering other relief programs:

PPP Loans and Unemployment

Businesses that received Paycheck Protection Program loans faced restrictions. To qualify for loan forgiveness, they needed to maintain payroll levels. Laying off employees to push them toward unemployment benefits jeopardized forgiveness eligibility.

This created tension: employees might receive more income through enhanced unemployment benefits ($600-$900/week) than their regular wages, but employers risked losing loan forgiveness by reducing staff.

Economic Injury Disaster Loans (EIDL)

Unlike PPP loans, EIDL loans didn't require maintaining specific payroll levels. Businesses could use EIDL funds for various expenses while reducing staff if necessary.

Employee Retention Tax Credits

The CARES Act also introduced employee retention tax credits—up to $5,000 per employee quarterly for businesses experiencing significant revenue declines. This incentivized keeping employees on payroll rather than laying them off.

What Self-Employed Workers Need to Know Today

While the PUA program has ended, self-employed individuals should understand current options:

Standard Unemployment Insurance for Self-Employed

In most states, traditional unemployment insurance still doesn't cover self-employed workers unless they voluntarily pay into the system (available in some states). However, some states use an "ABC test" or similar criteria that may classify certain independent contractors as employees for unemployment purposes.

Self-Employment Assistance Programs

Five states currently offer Self-Employment Assistance (SEA) programs:

• Delaware
• Mississippi
• New Hampshire
• New York
• Oregon

These programs allow unemployed workers to collect benefits while starting a new business, rather than requiring active job searches for traditional employment.

Documenting Income as a Self-Employed Worker

If you're self-employed, maintaining thorough financial records is essential. Should another emergency program launch or should you become eligible for unemployment benefits, you'll need:

• Tax returns (Form 1040 with Schedule C)
• 1099 forms from clients
• Bank statements showing business income
• Profit and loss statements

Tax Implications of Unemployment Benefits

Unemployment benefits are taxable income at the federal level and in most states. During the CARES Act period, many recipients faced unexpected tax bills because:

Withholding Is Optional

When you receive unemployment benefits, you can choose to have taxes withheld (typically 10% for federal taxes). Many people opted not to have taxes withheld to maximize their immediate cash flow, then owed significant amounts when filing tax returns.

The 2020 Tax Exemption

The American Rescue Plan Act of 2021 provided a one-time exemption: the first $10,200 of unemployment benefits received in 2020 was tax-free for individuals earning less than $150,000. This didn't apply to subsequent years.

Planning for Taxes

If you receive unemployment benefits today, consider:

• Opting for tax withholding to avoid a large bill later
• Setting aside 10-25% of benefits for taxes if you don't withhold
• Making estimated quarterly tax payments if you receive benefits for an extended period

Lessons Learned from CARES Act Unemployment Programs

The pandemic-era unemployment expansions revealed important insights:

The Gap in the Safety Net

Before 2020, self-employed workers, gig workers, and independent contractors—a rapidly growing segment of the workforce—had no unemployment insurance access. This created vulnerability during economic disruptions.

Administrative Challenges

State unemployment systems weren't prepared for the surge in applications or the complexity of new programs. Many states struggled with outdated technology, leading to massive delays and frustration for applicants.

Fraud and Improper Payments

The rushed implementation of CARES Act programs led to significant fraud. The Government Accountability Office estimated billions in improper payments and fraudulent claims, highlighting the need for better verification systems.

The Future of Unemployment Insurance

These lessons inform ongoing discussions about modernizing unemployment insurance:

• Should self-employed workers have permanent access to unemployment benefits?
• How can states upgrade technology to handle surges in demand?
• What verification methods can prevent fraud while ensuring quick access for legitimate claimants?

Simplify Your Financial Management

Whether you're navigating unemployment, managing a business, or handling both, keeping clear financial records is essential. Accurate bookkeeping helps you track income for unemployment claims, prepare tax returns, and understand your financial position during uncertain times.

Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data. Track income, expenses, and tax obligations in a format that's readable, version-controlled, and AI-ready—no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.