Resources
- IRS Tax Topic 418: Unemployment Compensation
- IRS Publication 525: Taxable and Nontaxable Income
- 2015 Form 1099-G
Why YOU Should Care
If you receive unemployment compensation during the year, the amounts may be fully taxable on your Federal and State tax returns. You can either have the money withheld as it is paid out to you or make quarterly estimated tax payments to cover the income. Either way, you need to budget for the taxes you may owe on the money received.
What is Unemployment Compensation?
Unemployment compensation includes:
- Unemployment benefits paid by a state or District of Columbia
- Benefits paid by the Federal Unemployment Trust Fund
- Railroad unemployment benefits
Unemployment compensation will be reported to you on a 1099-G for inclusion on your annual tax return.
Money received as Workers’ Compensation payments are exempt from taxation if they are received as part of the Workers’ Compensation Act. Payments that are actually disability benefits paid in lieu of unemployment compensation, however, are considered unemployment compensation and are taxable.
If your company offers a supplemental unemployment benefit plan, those amounts will be reported to you on a Form W-2 and are taxable as wages. Similarly, any severance payment received will be reported by your company on your Form W-2 and is fully taxable to you.
Benefits received from a private unemployment fund are income to you if you receive more in value than you paid into the fund in total. This income is reportable on your tax return as Other Income. If you receive payments from a union, these payments are also income if they exceed non-deductible payments you made into the fund.
Paying Taxes on Unemployment Compensation
Unemployment compensation is taxable income. It will be reported in total on your annual tax return for the year in which it was received. Just like with any other income received over the course of the year, you can choose to either calculate quarterly estimated taxes or have the income withheld as it is paid out, similar to how wages are received. To elect withholdings on your Federal unemployment payments, complete the Form W-4V.
State Taxation of Unemployment Benefits
If your state has an income tax, your unemployment benefits may be subject to taxation at the state level. A small minority of states exempt unemployment compensation from income and a few more exempt a certain minimum threshold. The majority fully tax unemployment compensation.
If your state taxes unemployment benefits, you can request to have taxes withheld as the benefits are paid out. Contact your state’s Department of Employment for more details on setting this up. You may be able to establish withholdings when you initially apply for benefits.
