If you become unemployed because the business you work for goes out of business or has to downsize, you can often collect unemployment while you seek a new job. This money is a form of insurance that businesses pay that is used to compensate former employees if they are terminated for reasons out of their control. The payments can be very helpful while seeking new employment, but as an article in Market Watch revealed, 37 percent of unemployment compensation recipients did not know that the IRS considers unemployment income and therefore it is taxable.
Unemployment Is Taxable
According to the Internal Revenue Service, unemployment compensation is considered income and therefore is taxable. Most states allow workers collecting unemployment to have withholding taken from their checks, but if that's not an option you'll need to set aside a portion of your check for taxes.
Options for Paying Taxes
States that offer to withhold taxes do so at a rate of 10 percent. So, if your unemployment check is $500, $50 would be withheld for taxes and you would receive $450. If you have to pay the taxes yourself, deducting 10 percent of your check and paying your taxes quarterly is a good idea.
According to the IRS, the usual tax dates are April 15 for income earned from Jan. 1 through March 31, June 15 for income earned between April 1 and May 31, Sept. 15 for income earned June 1 through Aug. 31, and Jan. 15 of the following year for income earned from Sept. 1 through Dec. 31.
How To Claim Unemployment
When it is time to file your taxes on your earnings from the previous year, you'll need a form sent to you from your state's unemployment office. According to the Internal Revenue Service, it is a 1099-G and it shows the amount of unemployment you collected the previous year. It is included as wages on your 1040 tax form. The taxes that were withheld from your unemployment will be included in the tax withholding section of your tax return.
In most cases, including this information is easy because you can select that you have a 1099-G tax form and your tax program will walk you through the process of entering that information and apply the information to the correct areas on your tax return.
Penalties for Not Claiming
If you opt to not let the state do withholding for you and you don't send in quarterly tax payments, you could be charged a penalty for not paying the taxes. However, in most cases, you'll be forced to pay taxes on the entire amount on your tax return.
This means that if you collected $2,000 a month in unemployment for six months, you could owe taxes on $12,000. At a 10 percent rate, this could mean a bill of $1,200 and could take a bite out of any refund you might have been receiving from other credits, such as the Earned Income Tax Credit. Or worse, you could owe the entire amount. This is why it is highly suggested that you allow the state to set up withholding for your unemployment.
- Market Watch: Are You Receiving Unemployment? Read This Before Filing Your Taxes
- IRS: Unemployment Compensation Is Taxable; Have Tax Withheld Now and Avoid a Tax-Time Surprise
- IRS: When to Pay Estimated Tax
- IRS. "Publication 525: Taxable and Nontaxable Income," Page 27. Accessed April 17, 2020.
- IRS. "Five Tax Tips on Unemployment Benefits." Accessed April 17, 2020.
- TurboTax. "Guide to Unemployment and Taxes." Accessed April 17, 2020.
- USA.gov. "Unemployment Help." Accessed April 17, 2020.
- CareerOneStop.org. "Learn More About Unemployment Benefits." Accessed April 17, 2020.
- IRS. "Form W-4V: Voluntary Withholding Request." Accessed April 17, 2020.
- IRS. "Topic No. 418 Unemployment Compensation." Accessed April 17, 2020.
- IRS. "Estimated Taxes." Accessed April 17, 2020.
- Center on Budget and Policy Priorities. "Introduction to Unemployment Insurance." Accessed April 17, 2020.
- IRS. "Instructions for Form 1099-G," Page 4. Accessed April 17, 2020.
K.A. Francis has been a freelance and small business owner for 20 years. She has been writing about personal finance and budgeting since 2008. She taught Accounting, Management, Marketing and Business Law at WV Business College and Belmont College and holds a BA and an MAED in Education and Training.