As if being out of work wasn't stressful enough, the Internal Revenue Service doesn't treat unemployment benefits with much compassion. Unemployment compensation generally gets included in your gross income calculations, which means you'll have to pay federal income taxes on each check. Many states also tax unemployment compensation. If you don't have funds withheld from your checks, you'll pay the price at tax time.
Unemployment compensation includes amounts received through federal or state agencies. State unemployment insurance benefits are included, as are benefits paid from the Federal Unemployment Trust Fund. Disability benefits that are intended to substitute for unemployment compensation also are taxable. In addition, 33 states and the District of Columbia fully tax unemployment benefits. Generally, however, you're not subject to Social Security or Medicare taxes on unemployment benefits.
To save yourself from a hefty tax bill on April 15, you can ask that taxes be withheld from your unemployment benefits, just as with job-related compensation. Some states have their own withholding forms and automatically hold back 10 percent of the gross amount of your benefit check before sending it to you. If not, hand in Form W-4V, Voluntary Withholding Request, to the unemployment office. You also can make estimated tax payments on a quarterly basis based on your projected income.
You'll receive a 1099-G at the end of the year that documents how much unemployment benefits you received and how much taxes were withheld. Report that on your income tax form by the April 15 deadline. The IRS also receives a copy, so failure to file a return puts you at risk of having to pay interest and penalties as well. Depending on your filing status and income level, you may be entitled to a refund for any money set aside for taxes.
Other Unemployment Benefits
Supplemental unemployment benefits that come from company-funded programs aren't taxed as unemployment but as wages. The difference is that you'll get a W-2 reflecting those amounts instead of a 1099-G, but you'll still be liable for paying taxes. If you obtain unemployment benefits from a private fund to which you voluntarily contribute, such as a union unemployment fund, the only taxable amount is the difference between what you paid into the fund and what you received.
- IRS.gov: Topic 418 -- Unemployment Compensation
- IRS.gov: Four Tax Tips About Your Unemployment Benefits
- MSNBC: For the Unemployed, too, the Tax Man Cometh
- Texas Workforce Commission: Federal Income Taxes & Your Unemployment Benefits
- Daily Finance: Jobless? Uncle Sam Still Taxes Your Unemployment Benefits