The 26S proteasome is an ~70 subunit ATP-dependent chambered protease that destroys proteins via multiple highly coordinated processing steps. The smallest and only intrinsically disordered proteasome subunit, Sem1 (DSS1 in metazoans), is critical for efficient substrate degradation despite lacking obvious enzymatic activities and being located far away from the proteasome's catalytic centers. Dissecting its role in proteolysis using cell-based approaches has been challenging because Sem1 also controls proteasome function indirectly via its role in proteasome biogenesis. To circumvent this challenge, we reconstituted Sem1-deficient proteasomes in vitro from purified components and systematically dissected its impact on distinct processing steps. Whereas most substrate processing steps are independent of Sem1, ATP-dependent unfolding is stimulated several-fold. Using structure-guided mutagenesis and engineered protein crosslinking, we demonstrate that Sem1 allosterically regulates ATP-dependent substrate unfolding via a distal conformation-dependent intersubunit contact. Together, this work reveals how a small, unstructured subunit comprising < 0.4% the total size of the proteasome can augment substrate processing from afar, and reveals a new allosteric pathway in controlling proteolysis.