How to Pay Taxes on Your Unemployment Benefits

Did you receive unemployment benefits this year? If so, you’ll have to report those payments on your federal income tax return. Not sure how to get started? Check out these tips to find out exactly what and how to report on your tax return this year.

What are unemployment benefits?

Unemployment benefits are financial compensation that you receive while unemployed. Whether you qualify and how much you get depends on your state of residence.

There are several types of unemployment benefits, including:

  • Benefits paid by your state or by the Federal Unemployment Trust Fund.
  • Railroad unemployment compensation benefits.
  • Disability payments from a government program paid as a substitute for unemployment compensation.
  • Trade readjustment allowances under the Trade Act of 1974.
  • Unemployment assistance under the Disaster Relief and Emergency Assistance Act.

How do unemployment benefits affect your taxes?

Unemployment benefits are considered taxable income. As such, you must report all unemployment benefits and pay taxes on them as though they were wages. If you received unemployment benefits this year, you’ll receive Form 1099-G in the mail. This form will inform you on how much money you’ll have to report on this year’s tax return.

Don’t forget benefits from union dues

You must also report any benefits from regular union dues paid to you as an unemployed member of a union. However, other rules apply if you contribute to a special union fund and your contributions are not deductible. If this applies to you, you need only report the amount you received that exceeds your contribution.

How can you minimize your losses?

You can’t get around paying taxes on your unemployment benefits. However, you can make the process easier on yourself, and can minimize your losses with other tax breaks. Try the following to maximize your savings this tax season:

Check out the Earned Income Tax Credit

If you’re unemployed, your gross annual income is probably lower than it would have been if you’d kept your job all year. As such, you may be eligible for the Earned Income Tax Credit (EITC). This tax credit is available for earners who have held a job for some portion of the year, and made less than a set amount of money for the year. Check out this chart to find out whether you qualify:

Filing StatusQualifying Children Claimed
ZeroOneTwoThree or more
Single, Head of Household or Surviving Spouse$15,270$40,320$45,802$49,194
Married Filing Jointly$20,950$46,010$51,492$54,884

If you qualify for the EITC, you can deduct that credit from your taxable income, and pay that much less in taxes this year.

Consider withholding federal income tax

This tip is retroactive, so it may be too late for this year. But if you’re still receiving unemployment benefits next year, you should choose to have federal income tax withheld from your unemployment benefits. You can make this choice using Form W-4V, a Voluntary Withholding Request.

Why would you want to withhold taxes from your unemployment benefits? Because if you do so, you won’t owe the IRS anything on your unemployment money when tax season rolls around. It’s a great way to avoid spending money that isn’t really yours. And since the tax rate for unemployment benefits is only 10%, it shouldn’t make too big of a dent in your unemployment checks.

Ready to get started?

Tax season can be challenging, especially if you’re already dealing with the trials and tribulations of unemployment. But don’t worry — there are people that can help. Compare top tax preparation firms to find the company that best suits your needs and your budget. These experts can demystify your tax return and help you get the most out of tax season.

Or if unemployment has hit you too hard and you can’t afford to pay your taxes, compare tax relief firms here. Tax debt is a serious burden. You should get ahead of it before it grows beyond your control.