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Guide to Unemployment and Taxes

Updated for Tax Year 2014


OVERVIEW

The IRS considers unemployment compensation to be taxable income—which you must report on your federal tax return. State unemployment divisions issue an IRS Form 1099-G to each individual who receives unemployment benefits during the year.


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If you received unemployment benefits this year, you can expect to receive a Form 1099-G “Certain Government Payments” that lists the total amount of compensation you received. The IRS considers unemployment compensation to be taxable income—which you must report on your federal tax return. Some states also count unemployment benefits as taxable income.

About unemployment compensation

Unemployment compensation is a form of monetary assistance provided by the federal and state governments to people who are out of work. These benefits are mostly funded by taxes that are paid by employers at the federal and state levels.

Generally, employees who are laid off or who lose their jobs through no fault of their own typically qualify for unemployment benefits. The amount of compensation they receive depends on the amount of time they worked, their earnings and the maximum benefit their state allows for. Taxpayers who want to receive unemployment compensation must apply for benefits through their state programs.

Tax impact of benefits

Unemployment benefits are included along with your other income such as wages, salaries, and bank interest. The total amount of total income you receive and your filing status will determine if you need to file a tax return.

Form 1099-G

State unemployment divisions issue an IRS Form 1099-G to each individual who receives unemployment benefits during the year. On this form, you’ll see the total amount of your compensation reported in Box 1.

When you receive benefits, you can choose to have federal and state income taxes withheld from their compensation to avoid owing a large amount of tax on your tax returns. If you choose to have income tax withheld from your benefits, the total federal tax withheld will appear in Box 4, while the state tax withheld will appear in Box 11.

Reporting unemployment benefits on your tax return

You report your unemployment compensation on your federal tax return in the income section. The amount will show up on a specific line of your tax form. Remember to keep all of your forms, including any 1099-G form you receive, with your tax records.

If you use TurboTax to file your taxes, we’ll ask about your unemployment income and put the information in all the right tax forms for you.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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