Taxes on Unemployment Benefits: Answers to Common Questions

unemployment benefits and taxesWhen you’ve been laid off and are collecting unemployment, money is already pretty tight. The last thing you need is a surprise next year when you do your taxes!

What is Considered Unemployment Compensation or Benefits?

Unemployment benefits typically include income received under US unemployment compensation programs (paid to you by DC under the Federal Unemployment Trust Fund) or State programs.

Is There a Tax on Unemployment Compensation or Benefits?

Yes, the IRS considers unemployment to be part of your total income for the year (gross income). However, you should be aware that unemployment is not considered to be EARNED income. You do need to pay income taxes on unemployment benefits, but you will not need to pay Medicare or Social Security taxes on the money in most instances.

What is the Unemployment Tax Rate or the Tax on Unemployment?

This depends how much you had in total income for the year. You’ll add your unemployment to your other income in order to figure out how much you’ll need to pay. The amount you will owe at the end of the year will change if you had taxes withheld from your unemployment at the time that you were receiving unemployment.

A good method of determining what the tax bill will be on April 15th is to use an estimator like the one at H&R Block and put in your projected income for the year. You can use your paystubs from your previous job and your unemployment paystubs to get an estimate of what your final tax bill will be. If that number is pretty high, you might need to set aside money before then, or have taxes withheld from your unemployment check if you haven’t already done so.

Can Unemployment Taxes Be Withheld?

In order to have Federal tax withheld (which is a good idea), you will need to fill out Form W-4V. Generally, if you choose to have taxes withheld, 10% of your unemployment payment will be set aside and sent to the Federal government. When you file your taxes, you’ll be able to apply that money as payment against your total tax bill. Most tax programs will automatically calculate this for you.

If you did not choose to have taxes withheld when you started receiving unemployment, you may be able to start having taxes withheld now. Contact your state unemployment agency and fill out a new Form W-4V to start having taxes withheld. If you aren’t receiving unemployment anymore, you can’t retroactively have taxes withheld.

An additional concern is that if you did not have taxes withheld from your unemployment checks, you might actually owe an underpayment penalty when it’s time to file your taxes. So if you didn’t have much other income and your unemployment was a big chunk of your income for the year, you might end up owing a lot in taxes, as well as potentially getting hit with the underpayment penalty for waiting to pay your tax liability.

How is Unemployment Reported to the IRS?

At the beginning of the next year, generally by February 15th, your state unemployment agency will send you a 1099-G. (Many states that use an online unemployment system will have it available on the website as a PDF and might not mail you a physical copy.) This form will show how much you received and any taxes that were withheld for you. The IRS will also have received a copy of this form. If the amounts don’t match up to what you’ve reported on your tax return, or you don’t report your unemployment on your taxes, the IRS will reject your return (though it can take months or years for them to actually tell you they’ve done so). So if you haven’t received your 1099-G by February 15th, you will want to contact your unemployment agency and ask for a copy. If you received any unemployment income, even if it wasn’t much, you will receive one of these forms and need to report the income on your tax return.

Where Do I Put My Unemployment on My Tax Return?

It’ll be added to Line 19 of Form 1040, Line 13 of Form 1040A, or Line 3 of Form 1040EZ. If you’re using a tax program to do your taxes, make sure that you tell the program you’ve received unemployment income this year.

Is Supplemental Unemployment Compensation Taxed?

Generally Yes! The IRS considers unemployment that your company paid you out of company funds to be a form of wages, so you’ll need to pay the same taxes on that money as you would on money you earned from a job - that is, income taxes as well as Social Security and Medicare taxes. Your company will make it easy for you to report, though, because these payments should be included on Form W-2 along with any other wages the company paid you before you were laid off, and they may in some cases have withheld income, Social Security and Medicare taxes as well.

Also, if you participated in a privately held unemployment plan, where you personally paid a fee to participate, you may not have to pay taxes on the money you were given by the plan if it doesn’t exceed what you paid in. Any payments you received above the amount you paid in won’t be considered earned income and will be reported on the line for “other income.” You won’t need to pay Social Security or Medicare taxes on this money.

Workers’ compensation is not considered unemployment even if you were unemployed at the time that you received it. Generally, workers’ compensation that is given to you in accordance with your state workers’ compensation laws is not taxed at all. One exception is if it reduces the amount of your Social Security benefits, in which case it might be taxed in the same way as your Social Security benefits. See Publication 525 for more details about workers’ compensation.

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