Yesterday I looked at who ultimately pays for unemployment benefits. Today I’ll be looking at the tax treatment of unemployment benefits.
Are unemployment benefits subject to income tax? The short answer is that, yes, such payments are indeed taxable.
For a slightly longer and more detailed answer, we have to look no further than the IRS website. According to IRS Tax Topic 418:
Unemployment compensation is includible in gross income. You must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.
Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a state. It includes state unemployment insurance benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund.
And it goes on from there. If you receive unemployment payments during the year, you should receive IRS Form 1099-G showing the amount of your unemployment payments at the end of the year.
It’s also worth noting that, if you haven’t requested to have income taxes withheld from your unemployment compensation, you may need to make quarterly estimated tax payments to avoid underpayment penalties.
Note that the only exception to the above occurs when you’re receiving benefits from a private fund to which you’ve voluntarily contributed. In that case, your benefits are only taxable to the extent that they exceed your contributions to the fund.
Bummer, huh? (At least for the unemployed.)