Are Unemployment Benefits Taxable?
How unemployment is taxed
Unfortunately, unemployment benefits count as taxable income on your federal return, but they're not necessarily taxed by your state. (See below for more information.)
If this catches you by surprise, don't feel bad. Many people find this out only when they file their tax returns.
One small consolation: If your income is low to moderate, however, you might not be required to file a federal return or to pay any federal taxes. To learn more, read Do I Need to File a Tax Return?
Unemployment compensation might or might not be taxable in your state. TurboTax will do the calculations for you when you prepare your state return.
Note: The rules for taxing unemployment have changed from 2009. For 2009 only, the first $2,400 of unemployment income was not counted as taxable income. For 2011 and future years, all unemployment income is subject to tax.
How to report unemployment on your federal tax return
At the end of the year that you’ve received unemployment benefits, you’ll get a Form 1099-G (and so will the IRS) reporting what you’ve been paid.
To enter the amount you've received in TurboTax, go to Federal Taxes, select Wages & Income, then scroll down to section "Unemployment and click Start.
(Note: In prior years, unemployment was reported in a different income section in the product.)
Reporting contributions to a private fund
If you received income from a private unemployment fund - to which you voluntarily contributed - your income won't be taxed up to the amount you contributed. Above that amount, the income is considered taxable, and must be reported on your tax return as "other income."
Consider having some unemployment income withheld
If you're worried about being stuck with a big tax bill on your employment income when you file your taxes, the IRS offers a way to avoid that.
Fill out Form W-4V to have 10 percent of your benefits withheld for federal income taxes. You can do this by typing your information directly on the form online, but then you need to make a copy and sign it. Send it to your state unemployment office.
Depending on your circumstances, you might even be required to make quarterly estimated income tax payments, because you’re no longer having taxes withheld by your employer.
Estimated taxes are what the IRS expects people to pay when their income is not subject to withholding, such as investment or self-employment income. It's typically paid four times a year.