Is Unemployment Compensation Taxable?


The short answer is YES – now continue reading for some important details.

Whether you do (or don’t) have to file a tax return doesn’t have anything to do with if you were (or were not) employed.  It depends entirely on how much income you received during the year.  Thus, those who were unemployed AND earned more than the filing threshold should know that unemployment benefits do qualify as taxable income.  In other words, Uncle Sam will count unemployment payments received as taxable income.

How To Report Unemployment Benefits Received On Your Return
Around late January or early February of the year FOLLOWING the year in which you received your benefits, you should get a Form 1099-G.  Box 1 will contain the amount of benefits you received.  If there were any Federal or State taxes taken out, they will be listed as well.

When you file your return, report your unemployment income on line 19 of Form 1040

[U.S. Individual Income Tax Return], line 13 of Form 1040A [U.S. Individual Income Tax Return], or line 3 of Form 1040EZ [Income Tax Return for Single and Joint Filers with No Dependents], depending on which form you use.  The Federal withholding’s will be tabulated in the appropriate section and the net result will either be a refund or a balance due.

What If You Didn’t Have Enough Taken Out?
In this post on our sister site we discuss how taxes work and how the refund or balance due is derived.  If you are still unemployed and receiving benefits when you discover you didn’t have enough withheld, contact the paying agency ASAP.  Instruct them that you would like to increase your withholdings.  As discussed in the post above, you will probably have to simply complete Form W4 and submit it to them.

What If You Can’t Pay The Balance Due?
In this post, we discuss what you can do if you can’t pay all at once.  The general options are set up a payment plan or tell the IRS why you can’t pay (e.g. unemployed, it would cause an undue hardship, etc.).  Just note that with the latter, you will have to supply some paperwork as proof as to why you can’t pay.  What, you expected the IRS to just take your word for it?

If you find yourself in the predicament of needing to set up an installment agreement and owe less than $10,000, take a look at the Got IRS Debt? page for our current pricing to assist you.