Is Unemployment Taxable? Tax Treatment on Unemployment Benefits Explained
September 25, 2023
Many people don't understand how unemployment income works, especially when talks of taxes, FUTA, or SUTA arise. In truth, questions such as ‘Is unemployment taxable?’ and ‘How is unemployment taxed?’ are erroneous.
Unemployment itself is not taxable, but unemployment income—or the compensation that the government temporarily issues to individuals who lost their jobs—is.
If you’re keen to unlock all there is to know about how taxes are levied on unemployment income, this article should serve as your trusted guide!
Key Takeaways
- Unemployment is taxable in the sense that the IRS considers unemployment benefits to be taxable income.
- Your unemployment benefits may be influenced by your tax liabilities and early withdrawals from your 401(k) retirement plan.
- Form 1099-G reports the amount of unemployment benefits you have received within the year. The said form also specifies any federal income taxes withheld from your regular earnings.
- It is important to keep track of your taxes owed and know the different payment options you have in case you cannot pay your taxes on time or in full on or before the tax due date.
Is Your Unemployment Income Taxable?
Yes, your unemployment income is taxable because the IRS identifies it as a form of taxable income. Part of the taxes levied by the IRS on your regular income goes to funding the government’s unemployment insurance.
The said insurance is designed to temporarily compensate workers who unexpectedly lost their jobs. Levying taxes on unemployment income is mandatory on the federal level but may have different regulations and tax rates on the state level.
In fact, some states do not impose taxes on unemployment benefits. Locally, the tax treatment on unemployment income or benefits is also not the same across all other localities.
Does Getting Unemployment Benefits Affect Your Tax Return?
Now that we’ve clarified whether unemployment is taxable, we’ll move on to explaining the implications of unemployment benefits on your tax return.
You need to consider the following factors when filing your tax return with your unemployment benefits in mind:
#1. Tax Liabilities
Have you been withholding federal and state taxes from your unemployment benefits? If not, then you must seek professional assistance in determining your tax liabilities.
List down all your income sources for the year, as well as any investment accounts and taxable and non-taxable income. In doing so, you can generate an estimated amount of your federal and state taxes owed and figure out how to pay them all.
#2. Early Withdrawal From Retirement Plans
Early withdrawals from your retirement plans can potentially hinder you from receiving unemployment benefits. Ideally, retirement benefits from your 401(k) or IRA accounts should be withdrawn once you reach 59 ½ years.
If you withdraw money from your retirement plans, you will be taxed on the amount you withdrew.
Even if your 401(k) plan allows a 401(k) hardship withdrawal, you will still be subject to a 10% penalty for early retirement plan withdrawals.
On the other hand, rolling over your 401(k) contributions to an IRA account cancels the 10% penalty but may still tax you on withdrawing funds prior to your retirement.
How to Report Unemployment Benefits
To report unemployment benefits, first, you need to review the tax rules imposed on the specific kind of unemployment compensation you received.
Not all types of unemployment income are taxable. Note that unemployment benefits are not considered a type of tax relief that you can claim. You cannot use the said benefits to claim Earned Income Tax Credit (EITC) either.
You can use the IRS’ Interactive Tax Assistant Tool to confirm whether taxes are levied on your unemployment benefits. You must also know which tax forms to use when reporting unemployment compensation.
If you receive Form 1099-G, Certain Government Payments, it should enumerate in Box 1 the amount of unemployment benefits you have received within the year. Box 4 indicates any withheld federal income taxes from your income.
Box 11 declares the amount of state income tax withheld from your earnings.
Report the amount indicated in Box 1 of your Form 1099-G on line 7 of Schedule 1 (Form 1040), Additional Income and Adjustments to Income. Report the amount indicated in Box 1 of your Form 1099-G.
Next, attach Schedule 1 to your Form 1040 or Form 1040-SR. You are not required to attach your Form 1099-G to your Form 1040 or Form 1040-SR.
Report the amount in Box 4 on your Form 1040 or Form 1040-SR’s line 25b, Box 4. In the event that you did not file for unemployment benefits but received a Form 1099-G, contact the authorities right away. This could mean that you are a victim of scams involving tax fraud or identity theft.
What to Do if You Can’t Pay Your Taxes
If you find yourself unable to pay your taxes in full, you must first ensure that you respond immediately to an IRS notice.
How Much Can You Pay?
Knowing the exact amount that you can afford to pay is the first step that will help you determine the next actions you can take. Once you have determined the initial amount you can pay, check out the different payment options available.
For instance, if you can pay the full amount in less than 180 days or five months, then you can request a 180-day extension to pay your taxes. To do this, contact the IRS at 800-829-1040 (for individual taxpayers) or 800-829-4933 (for businesses). You can also apply for an Online Payment Agreement plan.
What are Your Payment Options?
Keep in mind that you will possibly face penalties and interest on top of the taxes you owe. The penalties and interest will continue to double or triple until such time that your taxes owed are fully paid.
You can also pay via Direct Pay using your bank account, credit or debit card, E-file, or register and use the Electronic Federal Tax Payment system if you can pay the full amount immediately.
Offer in Compromise (OIC) is a viable option for taxpayers unable to pay the taxes they owe in full. However, it is best to check whether you qualify for OIC eligibility before offering a deal with the IRS to reduce your unpaid taxes.
Finally, in case your current financial situation prevents you from making any kind of tax payment, you can reach out to the IRS hotline to inform them of your situation. Try to appeal for an extension on the tax collection on your account.
Final Thoughts
So, is unemployment taxable? Once again, it is the unemployment income or benefits you receive that are subject to taxation.
The portion of your regular income that goes into paying your taxes helps fund the government’s programs meant to compensate unemployed individuals.
Check out our other tax articles if you want to expand your knowledge on all things taxes!
Is Unemployment Taxable FAQ
#1. If I paid taxes on unemployment, will I get a refund in 2022?
If you paid taxes on unemployment income, determining your entitlement for a refund in 2022 should depend on whether you paid an excess amount of income taxes on your unemployment benefits.
#2. Do you have to pay taxes on pandemic unemployment?
You have to pay taxes on pandemic unemployment, but how exactly depends on whether you received Pandemic Unemployment Payment (PUP) in 2020, 2021, or 2022.
The tax rates will depend on your overall annual earnings. In 2020, PUP was taxed and included in the end-of-year review. In 2021 and 2022, PUP was taxed in real-time and given the same treatment as other taxable social welfare payments.
#3. Do I have to claim unemployment on my taxes in 2022?
Yes, you have to claim unemployment benefits on your taxes in 2022. To do that, you must report and pay the federal taxes levied on your unemployment compensation. After that, expect to receive a Form 1099-G, which you will use as your guide in filing your tax return.
#4. What paperwork do I need to fill out if I collect unemployment?
To process your unemployment benefit, you’ll need the following paperwork or documents:
- Name, company name, address, and contact number of your last employer
- A copy of your most recent pay stubs or W-2 form if you do not have your latest pay stubs
- Social Security Number or card
- Any type of documentation that verifies your unemployment status; an example would be the termination letter or layoff notice sent to you by your last employer
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