The Internal Revenue Service regards federal, state and railroad unemployment compensation as taxable income. Generally, you must include your compensation in your gross income on your tax return and pay federal income tax on the amount. You can wait until you file your return to pay the tax. Or you may ask the unemployment agency to withhold taxes from your benefits.
Forms 1099-G and W-4V
The agency that pays your unemployment compensation files Form 1099-G with the IRS and sends you a copy. Your total unemployment compensation for the year is shown in Box 1 of the 1099-G. If you want the agency to withhold federal income tax from your checks, complete and submit Form W-4V. This practice is similar to payroll withholding, where you submit a W-4 to your employer for federal income tax withholding. As of 2015, the withholding rate for unemployment is 10 percent of each payment. Your withholding amount for the entire year is shown in Box 4 of Form 1099-G.
Report your unemployment compensation for the year on the appropriate line of Form 1040. You can get this amount from Box 1 of your 1099-G. For example, your unemployment amount goes on line 19 of Form 1040. If applicable, put the withholding amount shown in Box 4 of your 1099-G on line 64 of Form 1040. Comply with the 1040 instructions for the tax year in question when reporting unemployment compensation. For example, if you received a benefits over-payment in 2014, subtract any amounts you repaid from the full amount of your compensation and report the difference on line 19 of Form 1040. Write "Repaid" plus the repayment amount on the dotted area beside line 19.
Union or Private Fund Contributions
If you made voluntary contributions to a nonunion or private fund, your unemployment is taxable only if your total compensation is higher than the amount you paid into the fund. You pay tax only on the compensation amount that exceeds your total contributions. Your taxable amount goes on line 21 of Form 1040. If you paid regular union dues and receive unemployment benefits as an unemployed union member, report the benefit amount on line 21 of Form 1040. Different rules apply if you paid into a special union fund and your contributions are not deductible. In this case, report only payments you received that are more than your contributions.
Whether you must pay state income tax on your unemployment depends on the state. Your benefit is not taxable in states that do not have an income tax such as Alaska, Florida and New Hampshire. In certain states, such as Georgia and Alabama, unemployment is fully taxable. In other states, such as Montana and New Jersey, benefits are fully exempt from taxation. A few states, such as Wisconsin and Indiana, provide partial exemption. For state tax rules on unemployment compensation, visit the Tax Foundation website (see Resources).