Does Unemployment Compensation Count Toward Yearly Income?
Being out of work with bills to pay is no fun, especially if you have a family to support. If you are laid off or otherwise unemployed through no fault of your own, you may be entitled to unemployment compensation. The Internal Revenue Service does consider unemployment benefits to be taxable income and requires you to report them on your tax return.
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Unemployment Basics
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Unemployment benefits are paid to people who meet the eligibility and income requirements of the state where they were employed. Benefits are paid weekly. The number of weeks you can receive benefits varies depending on your past earnings and the rules of the individual state. You must be actively seeking work and report your employment status and job search activity to the appropriate state agency once each week. Usually this means making two or three verifiable job applications per week.
Types
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According to the IRS, unemployment compensation paid to you by the state and federal unemployment system (usually through the state department of labor) counts toward your yearly income. For tax purposes, disability benefits received in lieu of regular unemployment compensation, railroad unemployment benefits are also income, as are trade readjustment benefits. Supplemental unemployment benefits paid by employers and workman’s compensation are not considered unemployment compensation under these rules, although they may otherwise be taxable in some cases.
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Tax Filing
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Your state agency will issue you a 1099G form at the end of the year that states the amount of unemployment benefits you received during the year, along with any income taxes withheld from your benefits. You must attach the 1099G to your tax return and enter the amount on the appropriate line of your tax form.
Voluntary Withholding
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You are not normally required to have income taxes withheld from your unemployment benefit payments. However, you may wish to do so in order to avoid owing a large amount in taxes when you file your tax return. If you opt for voluntary withholding, ask for Form W-4V when you apply for unemployment benefits. Complete Form W-4V and submit it with your application.
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