Do You Pay Taxes on Unemployment?

Unemployment benefits can provide a financial lifeline when you lose your job. However, it’s important to remember that these benefits are subject to federal income taxes and, depending on where you live, state and local taxes as well. The IRS taxes unemployment benefits as ordinary income, and the rate you pay will depend on your total income, filing status, deductions, credits, and tax bracket.

How Do I Report My Unemployment Benefits?

You’ll report unemployment benefits as income on your federal tax return. Around the end of January, you’ll receive Form 1099-G from your state unemployment benefits administrator. This form shows the total amount of unemployment benefits you received for the prior year. If you don’t receive a 1099-G, check your state unemployment agency’s website for payment information.

How to Pay Taxes on Unemployment Benefits

There are two basic methods to ensure your tax bill is covered:

• Have money withheld from your unemployment checks: You can ask to have 10% of your benefit amount withheld from your benefit payment and applied toward your federal income tax. You may be able to request withholding when you apply for unemployment benefits, or use IRS Form W-4V to submit your request to your unemployment benefits administrator.
• Pay quarterly estimated taxes: To avoid underpayment penalties, the IRS requires you to make quarterly estimated tax payments if you expect to owe $1,000 or more on your final tax bill. Use IRS Form 1040-ES to estimate your tax liability and send quarterly tax payments to the IRS.

What to Do if You Can’t Afford to Pay Your Taxes

Paying your tax bill can be especially challenging when you’re living on unemployment benefits. If you don’t have the money (or available credit) to pay, you can request a payment plan from the IRS that will give you an additional 180 days or up to six years to pay. You’ll be charged a reduced late payment penalty plus interest for as long as you carry an IRS installment balance, but you’ll avoid collection consequences including seizure of assets.

Frequently Asked Questions

Should I Have Taxes Withheld From Unemployment Benefits?

Yes, having taxes withheld from your unemployment benefits can help you avoid a large tax bill at the end of the year.

Do You Pay State Income Taxes on Unemployment?

In addition to federal taxes, you may be liable for state and local income tax on unemployment benefits. Check the tax laws in your area to confirm.

Which States Don’t Tax Unemployment Benefits?

Some states do not tax unemployment benefits. It’s important to check your state’s tax laws to see if you are required to pay state taxes on your unemployment benefits.

The Bottom Line

Making ends meet on unemployment benefits can be challenging. Having to pay taxes on your unemployment benefits only adds to the challenge. While being unemployed doesn’t have a direct impact on your credit, using credit to cover your expenses while you’re on unemployment can increase your credit utilization and put you at risk for late or missed payments. You can check your credit score and credit report for free any time from Experian, to help protect your credit when you’re between jobs.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we understand the financial challenges that come with unemployment. Our team of experts is here to help you navigate your mortgage needs during these difficult times. Call us today at 213-732-3074 for personalized assistance and to learn more about our mortgage services.