Unemployment benefits are taxable income, so recipients must file a Federal tax return and pay taxes on those benefits. Depending on your circumstances, you may receive a tax refund even if your only income for the year was from unemployment. To receive a refund or lower your tax burden, make sure you either have taxes withheld or make estimated tax payments.
Taxes on Unemployment
Many people incorrectly assume that they won't have to pay any income tax if they're unemployed. All government unemployment benefits are counted as income, according to the IRS. If your only income for the year is your unemployment, the only tax form you'll receive is Form 1099-G. The easiest way to pay your taxes on this income is to file Form W-4V with whichever government agency sends your unemployment checks. You can use this form to ask the government to withhold 10 percent of your unemployment income for your Federal taxes. You cannot change this withholding amount.
If you don't want to withhold 10 percent from your unemployment benefits, your only other option is to send quarterly payments to the IRS as if you were self-employed. The downside is it's much more complicated to pay estimated taxes four times a year than to have the money withheld from your benefits.
If you don't use either of these options, you may find out at the end of the year that you owe the IRS penalties in addition your taxes -- a substantial amount of money, especially when you're unemployed.
Other Unemployment Payments
Not all unemployment payments are treated the same for tax purposes. Federal, state or District of Columbia unemployment benefits are included in Form 1099-G, but if your former employer provides its own supplemental unemployment payments these are taxed as regular wages and reported on Form W-2. You don't have to make your own tax payments on this type of unemployment compensation because taxes should be withheld by your ex-employer as if they were wages.
If you receive any unemployment payments from a private fund to which you voluntarily made contributions, you only have to pay taxes on those benefits if you end up receiving more than what you paid. If this occurs, you won't receive a Form 1099-G for those payments but you must still report the extra income as "other income" on Form-1040.
Some states tax unemployment benefits as income and some don't, so check your state's tax laws to determine whether or not you should be making payments to the state as well.
Getting a Refund
Just like any other taxpayer, you'll get a refund at the end of the tax year if you paid more than what you owed. You might be able to increase your chances of getting a refund if you keep track of all your job search costs throughout the year. These expenses are deductible, according to an article on tax tips for the unemployed on TIME.com.
If you have any dependent children, you might also be eligible for the child tax credit. This credit reduces the amount of taxes you owe, so it increases your chances of getting a refund, according to the question and answer page on the H&R Block website. However, unemployment benefits don't count as earned income so they don't qualify you for the earned income credit, the additional child credit or the child and dependent care credit.
- IRS.gov: Unemployment Compensation
- MSNBC: For the Unemployed Too, The Taxman Cometh
- TIME: Tax Tips for the Unemployed
- H and R Block: Get Answers
- 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.
Scott Thompson has been writing professionally since 1990, beginning with the "Pequawket Valley News." He is the author of nine published books on topics such as history, martial arts, poetry and fantasy fiction. His work has also appeared in "Talebones" magazine and the "Strange Pleasures" anthology.