Unemployment benefits can be a crucial support for those facing unexpected job loss.
If you collected unemployment compensation for the first time in 2023, you might wonder how it could affect your taxes. Since unemployment income is taxable at the federal level, it’s essential to understand how the process works and what information you’ll need to provide when filing your taxes. Let’s go over the basics.
At a glance:
- Unemployment payments are taxable at the federal level.
- State taxation of unemployment benefits varies by state.
- Form 1099-G details all the unemployment compensation taxpayers received during the year and any federal or state taxes withheld.
What is unemployment compensation?
Unemployment benefits are a form of financial assistance provided to those who have lost their jobs. Typically, your state administers unemployment compensation. You must meet specific eligibility criteria to qualify for unemployment benefits.
How do I know if I’m eligible for unemployment compensation?
Before diving into how unemployment is taxed, let’s review if you qualify for unemployment benefits. Eligibility criteria can vary from state to state, but in general, you must meet the following requirements to qualify:
- You lost your job through no fault of your own. In most cases, you can qualify for unemployment benefits if you were laid off, furloughed, or terminated due to reasons beyond your control. However, you usually won’t be eligible if you voluntarily resigned or were fired for misconduct.
- You meet your state’s earnings and work history requirements. Typically, you must have worked for a set amount of time and earned a minimum amount in the year before applying for unemployment. These requirements vary by state.
- You are actively seeking employment and are available for work. To receive unemployment compensation, you generally need to be looking for a new job and may be asked to report your job search activities.
- You must be registered with your state’s employment service if necessary. Some states require you to register with their employment service before receiving unemployment benefits.
Are my unemployment benefits taxable?
In short, yes, unemployment compensation is considered taxable income. When you receive unemployment benefits, you are required to report them on your federal income tax return. The IRS treats unemployment as income, just like wages or salary from a job, which means they are subject to federal income tax.
Do I have to pay state taxes on unemployment compensation?
The state taxation of unemployment benefits varies depending on your state. Some states don’t tax unemployment at all, some only tax a portion of unemployment benefits, and other states tax unemployment compensation the same as regular income.
If your state does not have a state income tax, you don’t have to worry about paying state income taxes on your unemployment compensation. In addition, Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia do not tax unemployment benefits, even though they impose state income taxes.
If you’re unsure whether your state taxes unemployment benefits, be sure to check with your state’s tax agency for more information.
Are my taxes on unemployment benefits withheld automatically?
To make it easier to pay taxes on your unemployment benefits, you can request to have federal taxes withheld from your unemployment checks. You can typically sign up for voluntary withholding when you initially register for unemployment benefits. If you choose this option, no matter what your tax bracket is, your benefits will be withheld at a flat tax rate of 10%.
If you did not choose this option when registering, you can still request your federal taxes be withheld by filling out Form W-4V, Voluntary Withholding Request.
You can also choose to make quarterly estimated tax payments or simply pay your federal taxes in one lump sum when you file.
Check with your state unemployment office for state tax withholding options, as protocols can vary.
What is Form 1099-G?
You should receive Form 1099-G, Certain Government Payments, from your state’s unemployment office during tax season. This form tells you how much unemployment income you received during the tax year, and you can use it to correctly report all your taxable income when filing.
The amount of unemployment income you received is reported in Box 1, and any federal tax withheld is reported in Box 4. State tax withheld is reported in Box 11.
You’ll use Schedule 1, Additional Income and Adjustments to Income, to report your unemployment compensation on your federal tax return.
Special considerations
If you received unemployment income this year, it could mean your income was less than in prior years. A lower income might make you eligible for tax credits you otherwise would not have been able to claim, such as the Earned Income Tax Credit.
Also, keep in mind that if you didn’t have enough tax withheld from your unemployment benefits, you should expect to owe more at tax time. The opposite is also true — if you overpay taxes on your unemployment income, you’ll receive any excess money back as a tax refund.
How do I report my unemployment income in TaxAct?
If you use TaxAct® to file your federal tax return, reporting unemployment income is straightforward. We’ll walk you through the necessary steps and help you report your unemployment income correctly using our tax software.