Are you wondering whether you can collect unemployment insurance if you have passive income? The quick answer is YES. Collecting unemployment insurance (unemployment benefits) is completely separate from how much you make in passive investment income.
By definition, passive income is not earned income. It's income generated by existing investments. The government isn't going to punish you for saving and investing for your future. Further, you have already paid taxes on the income you used to make your investments.
Active income, on the other hand, is the opposite of passive income. Active income means day job income (W2) income or consulting income. If you are making active income, then you likely will not be able to collect unemployment insurance.
Does Passive Income Affect Unemployment Benefits?
My friend and I got to talking about the article, “Don't Quit, Get Laid Off Instead.” We began to wonder what if we successfully engineered our own layoffs?
Would we be able to collect ~$1,800 a month in unemployment income while generating five figures a year in passive income?
In my research I spoke with people in human resources, a couple of unemployed folks, the CA unemployment office, and did extensive searching online. The conclusion is it doesn't matter if you make passive income. You CAN collect unemployment benefits if you have passive income.
There's no limit either. You can make $1,000 a year or $100,000 a year in (unearned) passive income and still collect unemployment insurance benefits! As long as you didn't perform any work, you can be eligible to get unemployment benefits.
Example Where Collecting Unemployment Benefits is Perfectly Fine
Let's say you work for 20 years and diligently save a majority of your after tax income every year. You somehow amass $2.5 million and decide to go really conservative.
So you buy ten, $250,000, 7-year CD's with a 4% interest rate. The reason why you buy ten, $250,000 CD's is because of the $250,000 FDIC guarantee limit ($500,000 for couples per account). Fair enough.
You love your job, but due to a restructuring, you are let go. The $100,000 a year you earn in passive income has no bearing on your ability to collect unemployment insurance benefits.
Investment Income And Unemployment Insurance
Why can you collect unemployment insurance if you have investment income? The $100,000 a year from investment income is separate from your job compensation. You are not working to make that money. That money is now working for you.
Your company could technically refute the unemployment benefit claim upon realizing you earn six figures in interest income. However, you don't have to reveal your personal finances to your employer. And if they were to deny your unemployment claim, you have recourse.
Perhaps the more interesting question is, “Should you collect $1,800/month in unemployment benefits if you have enough passive/unearned income to live?”
My answer is, absolutely yes. Just look at your W2 and see all the federal and state income taxes you pay each month. Fair warning – you might feel sick when you see how much comes out for taxes.
Passive Income Is Not Employment Income
The simple way to understand what type of income could deny or reduce an unemployment insurance claim is employment. Did you receive your investment income or passive income in exchange for work or employment? Nope! So it doesn't count against your unemployment benefits claim.
There really isn't a moral question to taking unemployment insurance while earning enough money passively to survive. You and your company paid for unemployment insurance all the years you've worked. And if you've found yourself out of a job for reasons no more than performance related, then you deserve to collect some money back for once!
Finally, if you can, always try and get laid off rather than quit. You'll receive severance, unemployment benefits, and ongoing training. If you just up and quit your job voluntarily, you get nothing!
The value of a severance package goes way up when there are enhanced unemployment benefits and a decline in interest rates. If you are planning to quit your job, always try to negotiate a severance package. If you do, you'll walk away with a financial cushion so you can retire early or take your time figuring out the next step of your journey.
Negotiate A Severance Package And Then Collect Unemployment Benefits
Never quit your job, get laid off instead. If you get laid off you get to collect usually up to 26 weeks of unemployment benefits. The amount of unemployment benefits could easily amount to over $10,000. In addition, if you successfully negotiate a severance package, you'll get even more money.
If you quit your job, you lose your eligibility to collect unemployment benefits. After all, you quit your job, which makes the unemployment benefits department believe you don't need the money.
In 2012, I negotiate a severance package worth over $100,000. Then I was able to collect 26 weeks of unemployment benefits because I was technically laid off. It was the best thing to ever happen to me, which is why I wrote my bestselling ebook, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye.
Use the code “saveten” at checkout to save $10. It will give you all the strategies to help you negotiate a severance package and break free from a suboptimal job. The book is now in its 6th edition.
For more nuanced personal finance content, join 70,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience.
Good article. But thanks to Biden, that 4% return is negative thanks to Bidinflation. Inflation harms savers and those without jobs (whose salaries supposedly adjust for inflation) the most. (Retirees, unemployed)
Inflation is back down to about 3.3%. Let’s hope it keeps going lower and in the right direction.
I’ve called my unemployment department 45 times since October 19, 2021 to try to get a hold of somebody in the “general information“ department. However I always get a message automated message that says “we are sorry we’re not able to find an available agent at this time. Please call back again later.“ Then it hangs up on me. does not even allow a “call back.“
I live in the state of Nevada, trying to figure out whether if I get roommates here in my home (passive income) if that’s going to disqualify me for unemployment. does anybody have any idea?
I doubt it. Unemployment benefits are tied to W2 income from a company. Renting out rooms is side income/investment income. You are still unemployed.
I was laid off in 2003. Luckily, I had been investing in multifamily Real Estate, and at that point, had accumulated something like 60 apartments. In fact, my boss said he chose me because “I was the rich guy”.
I was careful to disclose my RE activities during my unemployment insurance telephone interview, and it was OK.
Now my wife has been laid off, and the issue is here again. Telephone interview next Wednesday! I have advised her strenuously to disclose – we are not desperately in need of the unemployment money and it would be very inconvenient to be arrested for fraud.
I got fired from my job for not meeting sales. Got unemployment. Saved enough money to be off for a year plus I got unemployment all while finding a job that better suited my needs. I’d say if you can pull it off do it because we paid into this system and who know if we will ever get it again. Also, get food stamps while you can. Working people never rep the benefits of the system. I’m not promoting working the system well, yes, work the system.
You can only get food stamps if you make under $1,100/month here in SF and UB is $1,800/m.
What if you have 5 side jobs and then got laid off from your primary day job? do you not qualify for unemployment if your total side job income was just as much as your day job income?
It may depend on the state, but in my state, they withhold 25% of your unemployment benefit for each day (or part of day) you work. So, if you worked on 4 separate days in your side jobs, you would lose 100% of your UI Also, if the amount you earn in your side jobs for a week total more than your potential unemployment benefit, you would lose your benefit for that week, even if you worked less than 4 days.
UI claim filing rules vary wildly from state to state, and there may be limits on your ability to file in the future after you’ve filed once in your state. This means that if you file now during what may turn out to be a short term period of unemployment, you may not be able to file for UI assistance for a future, longer term layoff when you really need the money. (In this job market, it’s not only the folks with years of experience that get laid off – often times, it’s the “last hired, first fired” rule that applies.)
I earn a small amount of income from CDs so I’d be really bummed if I lost my job and didn’t qualify for unemployment because of that since the interest is no where near my salary pay. It doesn’t seem likely that passive income like CD interest would make someone ineligible. I don’t think the government is savvy enough to even check for that. Besides as you said, the income that was earned to fund the CDs occurred before getting laid off so it shouldn’t matter, at least it shouldn’t imo!
I’ve never been a fan of the mantra that “I paid into the system so I deserve it”. When I grew up, there was a stigma and some amount of shame attached to being on unemployment as a functional adult in a decent job market. I understand this job market is different, tougher, and nothing like we’ve seen in generations. I get that. But I’ve heard all too many people basically high fiving and loving this 99 week thing when they either a) are scamming the system or b) don’t need government assistance.
I’d like to think I could find a job with the time that I would anticipate severance to last which is often 6-12 months for a 30-50 something professional. Then, I’d like to think I would only take it if I needed it. I dunno, a millionaire, billionaire, whatever, is legally entitled to it. But we’ve been increasingly seeing that it doesn’t matter what’s right or wrong, just what’s legal.
In this economy, where there is no more loyalty to the employee, and people are being fired at will, left and right after giving DECADES of their lives to the firm, the LEAST people deserve is getting unemployment benefits.
There is no shame, and no stigma whatsoever.
Now that is an interesting issue you bring up. I have no idea as I myself believe social lending and stocks are active investments. However, I would be mad as all hell if I was disqualified just because I have stock or social lending investments I built from my working days.
Can you inquire with your social lending rep?
Thx
Sounds good. As you know, I can’t afford an accountant. j/k. Let us know what s/he says!
How about getting food stamps after winning the lottery? Remember this: https://www.usatoday.com/news/nation/2011-05-19-lottery-winner-food-stamps_n.htm
Sam, I was laid off for about 6 months or so back at the height of the recession. We got full unemployment benefits. The thing is, I could have also worked part time and made up to an additional $100/week that wasn’t counted against my benefits. Anything over that amount, would have reduced my benefit amount by that much. The max benefit for unemployment is determined by the state you live in along with anything that would reduce or negate benefits. My job was on the border between KS and MO. My friends in MO got $100 less/week because of the state they lived in. Also, while on unemployment you have to have proof that you are actively seeking a job. If they audit you (and that’s a big IF), you have to provide records of every job you applied for or you’re screwed. It was 5 jobs/week if I remember right. Not rocket science, but by the end of the term I was starting to run out of places to apply that I was qualified for and would pay enough to meet my expenses. Sorry for such a long comment, but it didn’t really seem like anyone who had actually collected unemployment in the states had commented.
Rachel,
This is fantastic perspective which I really appreciate. It really does seem like it all depends on the rules of each state. Were you able to easily collect for those 6 months? Or did the government make it hard on you?
Could you have gotten another 26 weeks if you applied since our government has a 99 week policy?
Thx
It wasn’t hard at all to collect for 6 months. You call in or log into their website each week and answer yes/no questions and collect the money. The kicker is having your back up in case you get audited. Since I was part of a large layoff, the company I worked for set up unemployment claims for us, and we were able to begin collecting immediately instead of waiting 2 weeks for our first check. I actually got a job right at the end of the first term of unemployment benefits. I had just applied and been approved for emergency benefits which would have started the day I started working.
Thanks Rachel. Sounds like an honorable company you worked for, and a relatively painless way to collect UI. So it really is at the power of the company that is letting you go it seems…. and less so the government.. Is this a correct assumption? If so, it is best to leave on good terms.
I’m in Canada and in my province, our system is broken. I have no qualms about collecting if I could after I was legitimately laid off, if I had passive income too… all the better. I pay for it too. The system is a little different here though as stated before, anything you earn gets subtracted from your unemployment so. I won’t be facing this dilemma anytime soon (nor so I have enough cash to be earning passive income)
Can you elaborate on “however, you don’t have to reveal your personal finances to your employer. And if they do deny you, you have recourse.” especially since you also live in the San Francisco bay area the advice would be helpful.
The funny thing is, it might be… you just have to check each State’s 1,000 page handbook on unemployment insurance just to make sure!!
Unemployment insurance is intended as a safety net for those who lose their jobs by no fault of their own. Although I agree that you should be entitled to collect U.I. if you truly lose your job, your talk of engineering your own layoff bears some similarities to torching your own property to collect the insurance money.
Also, while there are a lot of people out there struggling to survive on U.I., you make light of this as an opportunity to enjoy a vacation in the tropics.
It’s how optimists think about bad situations. Remind me never to invite you for a beer. You’d be a buzz kill.
OK, I’m on board now. Your company is looking to save money. You’re looking for a break. There is a line of people outside willing to do your job for a lot less than you make. Win-Win-Win!
That’s the spirit!
OK! You owe me a beer! :)
If only there were some sort of “loophole” like this to “get back” all the money we’ve paid into home-owners or auto-owners insurance over the years.
I wouldn’t see the moral problem with collecting the unemployment if that is what you actually are, unemployed. I personally would have a moral problem though if I had no intention of seeking further employment.
Thanks for the link in this one Sam. Much appreciated.
You might not have the intention of seeking further employment, however you NEVER know unless you are super rich when you will need a job again. It’s what the safety net is for.
Thanks for the mention Sam :) I liked the rewording of my post title too- less controversial, perhaps? ;)
PS who’s Jitsu? He looks like he’s having a good time :)
Yep, hate controversy! This is a G rated blog!
Jitsu is a niche character in He-man.
While I agree that if you paid into the system for a specific purpose (unemployment), you should be entitled to to take out when the time comes. It’s an insurance arrangement.
That said, it strikes me that the system has been designed in a manner which gives people an incentive (i) to underperform at work and (ii) not to work at all once they have been laid off.
I don’t think UI incentivizes people to underperform at work. It *might* incentivize people to be more picky in their job search.
A lot of people, including myself would appreciate a break and a little return from the government.
Thanks for the shout out, Sam!
I guess I have been fortunate in that I have always resigned when I left a job. Several people tried to convince me to apply for unemployment when I left my last job due to the unethical/abusive circumstances, but I honestly didn’t think the battle would be worth it since I left voluntarily. When I was a supervisor with the company, I saw how hard they fought to avoid paying – the HR lady bragged once that they’d only had to pay 2 claims in the 14 years she’d worked there.
For those who are laid off or unjustly terminated, I firmly believe they should be eligible for UI regardless of their assets. If the assets were so amazing, they probably wouldn’t have been working in the first place. People shouldn’t be punished for making prudent choices during the time they’re employed.
No problem Andrea. It must be freeing to resign on your own accord.
That is a scary story by your HR lady. I truly am kinda fearful of the HR ladies everywhere. That’s why I got mine a silk scarf from my last vacation abroad :)
I agree! Incentivize people to work at least part-time instead of NO TIME!
4% is good… have 4.15%, 4%, 3.75%, and 3% for 7 years. I kinda dread the renewal rates in 5 years. Hopefully the economy is rocking by then!
“Why would anybody bother working part-time, if there is such a rule that any income earned precludes one from receiving unemployment benefits?” Another thing is that (in Canada at least) if you become self-employed, you no longer qualify for UI. I imagine blogging and making some side income off of that would count.
Then would it be a good idea never to incorporate yourself until you can exhaust your UI benefits, or until the blogging/side income really takes off?
Assuming you were laid off ;)
Thank you for the inclusion, Sam! I know that for me that this was never an issue. It would be too long and hard to get laid off, and if you get fired for performance reasons, there are *no* unemployment benefits here in Canada. The passive income also doesn’t come into the calculation, but you do need to be actively looking for work and not sitting on your butt and collecting. ;) With $100k a year though this would not be a big worry for me.
I had a goal to reach $100,000/year in passive income. Unfortunately, CD interest rates have gone from 4% to 2% for 7 year duration, which means I need about $5 million cash now. It’s hard to get there now, which is why Im focused on income generation by other means.
I know someone in MI who collected the max term (2 years during the Obama extension) while maintaining several residential condos and an apartment building. He is making a full time income from rental properties (I am sure he classifies them as passive on his taxes or unemployment would certainly be denied).
Wow! Way to take advantage of the system! The thing is, rental income properties are considered passive on our taxes. Man, I totally forgot I have positive rental income cash flow as well! lol.
Indeed. Build that big NUT, live off your interest income, and when the time comes to leave your day job, engineer the lay off so you finally get some money BACK from the government.
Unemployment benefits are not means tested! If Romney were fired or laid off from a job, he would be eligible for unemployment. If you work part time, the earnings are used to reduce your unemployment benefits. The intention of unemployment is to give you a safety net or subsistence while you are looking for another job. Typically, unemployment is paid by the employer based on a rate using their experience factor. If the employer fires a lot of people, their rate will be high.
Some people think receiving unemployment is a discourages looking for work because you are getting money for not working. Even $1,800 a month is hardly enough to keep me happy. Can I collect as a retiree? LOL!
It shouldn’t be means tested….. it should be available for ALL tax payers, RICH or POOR.
You can get $1,800/month when you retire by engineering your layoff the day you retire!
Unfortunately, my status will change to retiree and I won’t be able to collect unemployment. I would have to get RIFed on a March 15th list and retire after the last day of school in June. I plan on putting in for retirement before that because it takes months to do!