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Are My Unemployment Benefits Taxable?

Tax Planning Taxes

Oh no! You just lost your job.

Lady looks in her mailbox for her unemployment benefits.

After you get over the initial shock, your mind naturally turns to thoughts of how to replace that regular income. Perhaps you’ll seek another job or maybe crank up your side gig efforts — or both.

Am I eligible for unemployment benefits?

Following the untimely departure from your job, you might be eligible for unemployment benefits. The U.S. Department of Labor Unemployment Insurance program provides benefit payments to eligible workers who lost their job “through no fault of their own.”

State laws determine what that means, but generally, you can’t collect unemployment benefits if you quit or are fired for cause. In addition, you have to meet other state eligibility requirements such as having earned a minimum amount of wages during a set period of time before you became unemployed. A formula determines the payment amount – not your financial need.

If you lived in one state but worked in another, it’s possible that the laws of the state of your employer — rather than the state of your residence — may apply.

Unemployment benefits are not meant to completely replace your salary forever. The amount of the weekly payments and the total period during which you can receive them are limited.

What am I required to do to collect unemployment benefits?

You generally must be ready, willing, and able to work.

Also, you must make genuine efforts to seek new employment by applying or interviewing for a specified minimum number of jobs.

It’s advisable to keep a detailed log of your job search efforts, including how you contacted a potential employer (by mail, email, telephone, in person, or online), the dates of contact, whom you contacted, and the results of your efforts. Keep this log for your records. You might be required to furnish it to the state’s unemployment authorities on demand.

The state requires you to report your information weekly. You might be required to file your claims online or on the phone.

Are my unemployment benefits taxable?

You might wonder if the unemployment benefits you receive are taxable income.

In short, yes.

Wait, what? It wasn’t your fault you were laid off or otherwise lost your job. You’re not working, you receive payments from your state, but you have to pay taxes on that income? It seems absurd.

According to the Internal Revenue Service (IRS), unemployment benefits are considered taxable income and must be reported.

After the end of the tax year, the state that paid you the unemployment benefits should send Form 1099-G, Certain Government Payments. The form should show the total amount of benefits paid to you during that tax year.

Whether you will actually owe taxes for the tax year(s) in which you receive unemployment benefits depends on your tax situation.

You may choose to have federal income tax withheld from your weekly payments to lessen the chances that you might owe taxes for that year. File Form W-4V, Voluntary Withholding Request, with your state to instruct them to withhold federal income tax.

Alternatively, you might have to make estimated tax payments during the year.

What if I earn money from a side gig?

If you work part-time or are self-employed during your period of unemployment, you might be eligible for partial unemployment benefits. You will generally need to report to your state the amount of your gross income from those sources. Failure to do so may constitute fraud.

All the states take unemployment insurance claim frauds seriously. They may impose serious penalties if you make false claims such as not reporting income.

The bottom line

No one enjoys losing their job, and it’s scary when your income suddenly disappears. If you qualify, unemployment insurance benefits may help tide you over while you search for a new — and maybe better — job or start your own business.

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