Can You Draw Unemployment If You Worked for Cash?

Unemployment benefits can be a lifesaver when you find yourself out of work through no fault of your own, providing you with at least some income to put toward your living expenses, usually about half of what you were earning. But unemployment insurance is a joint program between the federal government and individual states, so it's riddled with qualifying rules you must meet before you can get your hands on that money.

Unfortunately, working for cash might disqualify you, but it can depend on your employer.

The first immutable rule is that you must work for some form of compensation, and there has to be a record of it. The amount of your benefits depends on how much you earned while you were working. This can be tricky if your employer pays you in cash, which typically means "under the table." Taxes might not be withheld from your pay, and deductions for unemployment insurance most likely aren't taken, either. You – and your employer – must pay into state and federal unemployment programs for you to be covered.

Most state unemployment offices will want to see your paystubs when you apply for benefits, and they'll most likely want you to identify your employer as well. This could be a problem if your employer has been dodging federal withholding requirements and payroll taxes but paying you in cash. But there's a slim possibility that they've been submitting taxes and unemployment insurance on your behalf, just not writing you a check for the balance of wages or salary you're owed.

You can ask them for a wage statement to confirm what you were paid in this case, or a copy of your W-2 tax form that should show both withholding and the amount of your pay.

You might be self-employed in a business where your clients or customers pay you in cash. It's unlikely that you'll be able to collect benefits in this case, either, if you don't personally contribute to your state's unemployment insurance program. You usually have the option of voluntarily paying into the program, however, if you don't happen to have an employer who withholds and takes care of this for you.

It's also possible that you did earn wages, but cash tips represent the bulk of your income because you worked in the hospitality industry. Again, you could have a difficult time substantiating your earnings unless you kept meticulous records or your employer reported your tip income to the IRS. The unemployment insurance program does recognize cash tips as income, but you must be able to prove how much you received.

The good news here is that you've almost certainly contributed to your state's unemployment insurance program because you were earning at least some hourly base wage. The bad news is that your benefits might be based on very little hourly wage income, not your total income when tips are added in.

The nature of your work is also important, because not all types of employment are guaranteed to be covered regardless of whether you're paid by cash or by check. For example, domestic workers in private homes aren't covered by unemployment in Pennsylvania. Check with your state for a list of "exempt" services to find out if you qualify.

Unemployment rules aren't carved in granite for all time. Remember, the federal government works in tandem with your state to ensure that everyone who's entitled to benefits is covered. Both state and federal governments can step in to provide additional relief during times of economic crisis, such as the COVID-19 pandemic.

The following provisions have been put in place in 2020 under the terms of the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020.

• Freelancers and gig workers can qualify for unemployment insurance through the end of 2020 under the CARES Act. You'll still have to be able to provide proof of your income, but a copy of your most recent tax return coupled with detailed income records might suffice.

• The CARES Act also increases unemployment insurance payments by $600 a week through July 30, 2020, which can help those who work for tips and whose benefits are based on a very low hourly wage.

The worst-case scenario is that you'll be denied benefits because you – or your employer – can't show proof of your cash income. You won't know, however, unless you apply. It's better to be turned down than to wonder if you could have had a little money to help make ends meet while you're out of work.