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Must I Pay Taxes on Unemployment Benefits?


January 20, 2012

Unemployment is rampant throughout the US (and the world, for that matter) and many of us, some for the first time, are collecting unemployment as a way to get by until we are able to find suitable employment. It seems like we are having enough trouble paying our rent and usual living expenses. Do we really have to pay taxes on our unemployment benefits as well?

Although it feels like having salt rubbed into a wound, unemployment benefits are considered taxable income at both the federal and state levels.

Taxable unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a particular state, so both the state benefits as well as any federally-funded extended benefits are considered taxable income. It also includes railroad unemployment compensation benefits, and disability benefits that you have received as a substitute for unemployment compensation. Unemployment compensation does not include Workers’ Compensation.

However, supplemental unemployment benefits from a company-financed fund, are not considered to be unemployment compensation. Instead, those benefits are fully taxable as wages, and are reported on Form W-2 as income.

Some states will withhold 10% of your unemployment benefits to cover the taxes. If your state allows that option, you will be notified of it when you sign up for unemployment. It’s a good idea to select this option if you can, as it will save you from having to come up with the extra money when you file your returns.

If you have received unemployment compensation benefits during the year, you should receive a Form 1099-G, which is a report of income received from a government source. Any unemployment compensation you have received must be reported in the appropriate places on both your federal and state returns.

Thankfully, there’s a good chance that if you have had withholding done you may get a refund. Also, some of the expenses you have incurred while you have been searching for a job are deductible – such as the cost of phone calls to prospective employers, the costs of preparing and copying your resume, career counseling, etc. You may even be eligible for some tax credits if you have taken classes in your line of work to improve your chances of getting hired.

Your PRO-TAX preparer can help you with any questions you may have about what to report, and what is deductible. You can easily make an appointment to see your favorite professional preparer at your local PRO-TAX office by clicking Here, or by calling PRO-TAX at 800-809-2829.