If your state has income taxes, you may have to pay state taxes on your unemployment insurance as well. Check to see if you can withhold state income taxes from your unemployment as well. Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia have income taxes but do not tax unemployment benefits as income.
How Do Unemployment Benefits Work?
Unemployment is a benefit paid by state or federal governments to help people who have lost their jobs through no fault of their own. It usually does not apply if you quit your job or were fired for cause. If you believe you are eligible for unemployment, you would contact your state’s unemployment insurance program to apply for unemployment benefits. Certain limitations apply as to the amount you’re eligible to receive, and they can vary by state. Unemployment taxes are paid by employers and these taxes go into a state fund to aid workers who have lost their jobs. The U.S. Department of Labor (DOL) monitors the system.
Withholding Taxes From Unemployment Compensation
The IRS views unemployment compensation as income, and it generally taxes it accordingly. You can elect to have federal income tax withheld from your unemployment compensation benefits, much like income tax would be withheld from a regular paycheck. Unfortunately, you don’t have a choice as to how much you want to be withheld. Federal income tax is withheld from unemployment benefits at a flat rate of 10%. Depending on the number of dependents you have, this might be more or less than what an employer would have withheld from your pay.
Making Estimated Tax Payments
You might be required to make payments directly to the IRS as quarterly estimated tax payments if you elect not to have taxes withheld from your unemployment benefits. This works out to a payment once every three months. You can elect to do this instead of having 10% withheld from every unemployment check, giving yourself a little bit of wiggle room when money is tight. You might even have to make quarterly payments in addition to withholding from your benefits. You’re obligated to make estimated payments if you expect that your withheld taxes plus any refundable tax credits you’re eligible for will be less than 90% of what you’ll owe, or 100-110% of the total taxes you owed last year, depending on your AGI.
Reporting Unemployment Income for Taxes
Your state’s unemployment agency will report the amount of your benefits on Form 1099-G. The IRS gets a copy, and so do you. The form will also show any taxes you had withheld. You must report these amounts on line 7 of Schedule 1. Then, add the amount of tax withheld from Form 1099-G Box 4 to line 25b of your Form 1040 or Form 1040-SR. Finally, attach Schedule 1 to your return.
The Bottom Line
Your unemployment income will be taxed right along with any other income you might have earned during a calendar year. Use Form W-4V to withhold any tax from your unemployment income, or pay quarterly taxes to ensure you don’t owe the government any penalties come tax season. And always consider working with a tax professional or calling the IRS for help if you have questions about your specific situation.
