Does Freelance Work Affect Jobless Benefits?

by Kosmo on 2012-03-134

A writer friend just lost her day job. She wasted no time in filing for unemployment benefits and is now looking for another job. While losing a job is rarely a good thing, it does give her more free time to work on her writing. J.K Rowling famously turned lemons into lemonade by writing her first Harry Potter book while surviving on state aid. (I’d love to see someone calculate the ROI on the money the government paid her in state aid — the hundreds of millions she has paid in taxes over the years would likely make the return on investment look positively Madoffian.)

My friend Elizabeth is currently looking for a publisher for her first novel and is hard at work on her second novel. While this downtime will give her the chance to work on her fiction, she’s also going to pursue some freelance work to put some food on the table. This begs the inevitable question — does freelance work affect jobless benefits? Will Elizabeth jeopardize thousands of dollars in unemployment benefits by taking a $50 freelance job? Here are a few financial questions that may be of interest to freelancers.

Do I need to report income earned from odd jobs?

Yes. If you earn money from odd jobs and don’t report it, you could endanger your eligibility for jobless benefits in the future. The income should be reported as it is earned, not as it is paid. If you take a freelance job that runs for four weeks and you get a check for $200 at the end of the four weeks, this doesn’t mean that you should report the $200 as being earned in that week. Assuming that the work was evenly distributed, you would claim $50 for each of the four weeks.

If someone pays you more than $600, then they must file a 1099 form. In these cases, there’s going to be a paper trail of your earnings. Even if the amount is less than $600, you are required to include it in earnings (both for tax purposes and unemployment purposes).

How does freelance work affect my unemployment benefits?

I wish I had a simple answer, but every state handles things a bit differently. There are a few different ways that income from odd jobs (such as freelance work) can affect your benefits:

No effect – There may be a certain amount of money you can earn without causing any reduction in earnings.

Partial reduction – You may see a partial reduction in benefits. For example, for every dollar you earn up to a certain amount, jobless benefits are reduced by 40 cents.

Dollar for dollar reduction – Above a certain amount, benefits may be reduced dollar for dollar (each additional dollar of income reduces benefits by a dollar). If benefits are reduced to zero for a particular week, it’s common for your unemployment eligibility to be extended for another week (tacked on to the end).

My advice would be for you to check with your state’s unemployment office. The rules vary quite a bit from state to state. So before you grab the phone to call about your benefits, head to the web and check out the web site for your state’s unemployment office. Many government agencies provide answers to a lot of commonly asked questions on their web sites.

If you can’t find the answer, or need some clarification, grab the phone and call the unemployment office. The employees at the unemployment office are there to serve you — don’t hesitate to ask for clarification on certain questions. Bear in mind that government employees can often be the target of angry callers; making an effort to be polite and friendly can work wonders (this is a good rule in general).

Should I bother with freelance work?

Definitely! And many of the folks who run online businesses will attest to this.

But I’d suggest taking a moment to familiarize yourself with how your state’s unemployment rules will affect you before you decide to take on any freelance work. Once you’re over that hurdle, I’d definitely recommend moving ahead and taking on this work. The best case scenario here is that one of the freelance gigs you take could ultimately turn into a full time job. Even if that doesn’t happen, the freelance work should allow you to keep your skills fresh between jobs and should allow you to build your base of contacts.

What else can you expect out of self-employment?

I’m glad you asked. First of all, you’re going to be paying more in taxes. If you have self-employment income, you pay both the employee and employer’s share of FICA (Social Security and Medicare). Traditionally, the rates are 7.65% (6.2% social security, 1.45% medicare) for both employer and employee for a total of 15.3% (although the employee rate was cut to 5.65% in 2011, with congress discussing an extension to this cut). You’ll want to take the tax burden into account when you set your freelancing rates. After all, you could easily end up with less than $500 in your pocket from a $1,000 job!

If you decide to launch a full fledged business at this time, then be sure to check out Steps to Setting Up A Home Based Small Business.

Copyright © 2012 The Digerati Life. All Rights Reserved.

{ 4 comments… read them below or add one }

Julie @ Freedom 48 March 13, 2012 at 7:31 pm

It definitely pays to do the research. In Canada I believe you’re able to earn a small amount of income while collecting benefits. Anything earned over a certain amount will affect the benefits. BUT… benefits are guaranteed to run out eventually. A side job or freelance work has the potential to grow and become more than just a tiny source of income. it’s definitely worth pursuing!

GB March 14, 2012 at 12:44 pm

Wow! I didn’t know about the $600 requirement for filing the 1099. When I used to pet-sit, sometimes I’d be paid around $500 per job which is pretty darn close.

I’m going to have to bookmark this article as a reference for if I ever start free-lancing 🙂

Silicon Valley Blogger March 14, 2012 at 2:33 pm

Yes that’s right. I send out a few such forms every year. Also, if you don’t receive one from someone who’s paid you more than $600 for the year, then you should request this form. Usually, they’ll require a W-9 from you (they’ll need it on file) so they can process and send you this info. There is an exception if you deal with people outside of the U.S.

Kosmo @ The Soap Boxers March 14, 2012 at 7:50 pm

GB – Just to make sure we’re on the same page, it’s the person PAYING the $600 who who file the 1099, not the person receiving. You’d have to claim any and all earnings on your taxes, but you wouldn’t file the 1099s.

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