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Understanding Unemployment & Taxes

Understanding Unemployment & Taxes

The IRS takes into account taxable unemployment insurance income, which you must report on your federal tax return. The state's Division of Unemployment issues an IRS Form 1099-G for each person who receives unemployment benefits during the year.

If you received unemployment benefits, you could expect to receive a 1099-G "Additional Government Payments" form showing the total amount of unemployment benefits you received. The IRS takes into account taxable unemployment insurance income, which you must report on your federal tax return. Some states also consider unemployment benefits as taxable income.


About Unemployment Insurance

Unemployment insurance is a form of monetary assistance provided by federal and state governments to unemployed workers. These benefits are primarily funded by taxes paid by employers at the federal and state levels.

In general, employees who are made redundant or who lose their jobs through no fault of their own are generally entitled to unemployment benefits. Taxpayers wishing to receive unemployment benefits must apply for benefits through their state programs. The amount of compensation they normally receive depends on:

  • The amount of time they worked

  • The maximum benefit allowed by your state

  • Their earnings


Tax impact of benefits

Unemployment benefits are included with other income, such as wages, salaries, and bank interest (for the fiscal year 2020, the first $10,200 of unemployment income was tax-exempt for AGI taxpayers below $150,000). The total income you receive, including unemployment benefits and the status of your tax return, will determine if you need to file a tax return.


Form 1099-G

The state's Division of Unemployment issues an IRS Form 1099-G for each person who receives unemployment benefits during the year. In this form, you will see the total amount of your compensation shown in Table 1.

When you receive benefits, you can usually choose to withhold income tax from your payment to avoid a large amount of tax on your tax return. If you choose to withhold income tax from your benefits,

  • The total federal tax withheld will be shown in Table 4.

  • The withholding tax will be shown in Table 11.


Reporting unemployment benefits on your tax return

Report unemployment benefits on Schedule 1 of the federal income tax return in the Additional Income section. The amount will be transferred to the main form 1040. Remember to keep all forms, including the 1099-G forms you receive and tax documents.

If you employ the services of a tax professional to file your taxes, they will be able to claim your unemployment income and fill out the information on the appropriate tax forms for you.


Summary

  • If you choose to withhold your income tax from your benefits, the total federal tax withholding will appear on box 4 of Form 1099-G, and the tax withholding will appear in box 11.

  • Record unemployment benefits on Schedule 1 of the federal tax return in the "Additional Income" section and enter the information on Form 1040.

  • The IRS and some states treat unemployment insurance as taxable income, which you must report on your federal tax return.

  • The reportable compensation amount will be displayed in Box 1 of Form 1099-G, "Certain Government Payments," which will be provided to you by your state's Division of Unemployment. Keep this form with your tax documents.


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