Do I Have to Pay a Tax on Unemployment Compensation?

Unemployment Compensation Checks

Do I have to pay a tax on unemployment compensation?

The IRS isn’t about to let the fact that you don’t have a job stop it from collecting taxes from you.

You are required to pay taxes on any income received.

That includes the income you receive in the form of unemployment compensation.

And, of course, if you were employed for part of the year, you will have to pay income taxes on that money as well.

The good news is that your employer likely automatically withheld taxes from your paycheck (you probably filled out a W-4 Form when you began working for the company). The bad news is that the government won’t automatically withhold your taxes from your unemployment income.

If you want money withheld for taxes, you will have to take some initiative and request a Form W-4V. Fill this form out, and you can have 10% of the unemployment income you receive withheld.

This makes the process a little easier. It’s not fun, when you are out of work, to have 10% of your unemployment compensation withheld, but it’s easier to pay in those small chunks over time than to be slammed with a big tax bill all at once.

Tax Break on Unemployment Compensation Expired

For those who have been unemployed for more than a year, this tax season’s changes could bring an unpleasant surprise: Taxes on the full amount received in unemployment compensation. In 2009, as part of the economic stimulus package, Congress allowed a tax exemption the first $2,400 of unemployment compensation received.

This per-person exemption meant that those who were married could receive an exemption for up to $4,800 in income from unemployment compensation. What some may have forgotten, though, is that this exemption only applied for the 2009 tax year. That tax year is long past; this coming season is for tax year 2011. There is no exemption for unemployment compensation at all. So you will have to be prepared to pay taxes on all of what you received.

Get Ready to Pay What You Owe

If you received unemployment compensation in 2011, you will have to pay taxes on them in 2012. Tax returns are due by April 17, 2012 (the last day to file taxes has been extended this year for everyone). For many people who have been unemployed for a long period of time, and who have little household income, chances are that the tax bill won’t be very big anyway.

However, when you are unemployed, any obligation can seem overwhelming. That means that it is a good idea to begin preparing to pay what you owe right now.

By the end of January or the beginning of February, you should be receiving your 1099-Gs. These forms will explain how much of your unemployment income should be reported for tax purposes. Add that income to the any other income you have received (from your spouse, selling investments, part-time or contract work, interest earned on deposit accounts, etc.) and figure out how much you have made.

You can get an estimate of what you will owe by visiting with a tax professional. A tax professional can help you figure up your deductions, apply credits and the amount of taxes you might have already paid, and come up with a total owed. Can’t afford a professional, visit the free TaxCaster tool from TurboTax.

It is also possible to prepare yourself by looking at a federal tax bracket. Find out how much you will owe for your income range, and subtract what you have already paid in taxes.

This will give you a rough estimate of what you owe if you don’t want to figure out deductions and credits right now, and you aren’t prepared to pay a tax professional.

However, if you are unsure of what you will owe in taxes, it is a good idea to prepare your tax return as soon as possible so you can explore your payment options, which include saving up now, or getting a loan from the IRS (or from somewhere else) to cover the bill.

Find out what to do if you can’t pay your taxes.




Last Edited: May 7, 2013 @ 2:02 pm

Comments

  1. I know that you can elect to have taxes taken out from your unemployment check, but I wonder how many people actually do it, thinking they will get a job and will be able to handle the tax bill later? Then, there is still no job, but the tax bill is still due. That would be a very tough situation to be in.

  2. I am a single dad with a 20 years old son at home, I am 45 years old, me and my son both went to school full time last year but because I did not earn an income of my own, I can’t seem to get any tax credit for going to school, or one for my son too.

    I collected $19,800 in unemployment benefits ( about $380 gross per week ) and no I did not pay any taxes. I pay $650 per month for rent, a bare minimum of $600 a month for food for 2, about $300 for utility per month. So, by paying $120 in taxes and reducing my weekly benefit to $260 a week? I applied for food satmps so I can pay the tax and still survive, they said I make too much in “Gross” income of unemployment benefit to be eligible for food assistance. Seems dead end every which way so I had to collect everything I could to survive, now I did my taxes online with Turbo Tax, it says I owe about $1,600 in taxes total for both fed and state taxes.

    How does someone like me pay taxes? I still have no income, my unemployment is running out in few weeks……. Should I go and buy a gun, and rob from the rich to pay the IRS? If I don’t pay my taxes, I go to jail. If I rob someone, I go to jail. Same result either way, but the end result will be they feed you 3 good meals a day, kind of like a hotel but you can’t go anywhere.

    Lost a good job few years ago, lost my house to a short sale before foreclosure, went through a divorce, almost died from a bleeding ulcer, went through a chapter 7, had my car reposessed, now I have to pay taxes but no money……… Do I shoot myself or rob someone to pay IRS? Not much options…………………any help would be appreciated

    • GetaSmart says:

      Maybe, tell IRS that minimum payment plan is all you can afford for $20 a month, as long as you’re making an attempt to pay and send money, you won’t go to jail.
      Dude your life is luxury compared to 3rd world war zone countries with no freedom. Go to library, check out a motivational book, use free internet to apply for jobs, get your head on straight, teach your son to be a fighter and that today is the best day in your life to begin a turn around to success. Don’t cry in the corner, go to church and watch “It’s a Wonderful Life”; network with your old buddies and get a job, teach your son to be creative and productive. Shoot yourself? Rob Someone? NOT FUNNY, BE A MAN !

    • GetaSmart says:

      Maybe, tell IRS that minimum payment plan is all you can afford for $20 a month, as long as you’re making an attempt to pay and send money, you won’t go to jail.
      Dude your life is luxury compared to 3rd world war zone countries with no freedom. Go to library, check out a motivational book, use free internet to apply for jobs, get your head on straight, teach your son to be a fighter and that today is the best day in your life to begin a turn around to success. Don’t cry in the corner, go to church and watch “It’s a Wonderful Life”; network with your old buddies and get a job, teach your son to be creative and productive. Shoot yourself? Rob Someone? NOT FUNNY, BE A MAN !

  3. That’s a tough situation, Gene. The IRS actually allows you to pay in installments. You can go here: http://www.irs.gov/individuals/article/0,,id=149373,00.html. There is an interest rate, but it is rather competitive — better than what you would get if you paid with a credit card.

  4. @Everyday Tips – I didn’t know that. Thanks for sharing that detail. Like you, I think it’s safe to say that not many people choose to do so.

    @Gene – Sorry to hear about your tough time, man. Take Miranda’s advice and check on an installment plan. I know you are partly kidding about the jail stuff, but know that the IRS is only interested in jailing people who are purposely evading large amounts of tax. Your case would be due to hardship and they will work with you. Keep your head up and get you and your son back to work. Have you considered moving to where there are more jobs? If it’s just you two, head Southwest to where the jobs are.

  5. jakesmom says:

    Sorry to hear of your bad time. My husband was out of work for almost a year. He collected unemployment during that time for a total of like $4800. He only got about $138 a week. Thankfully I have a full time job and we barely made it through. Our problem is that we will have to pay taxes on the unemployment for 2010. I worked two jobs (I had a home dog grooming business that I have had to since quit because of a shoulder injury) The bigger problem is that his former boss lied to the unemployment office and said he had refused work which he didn’t. We even have phone records showing that my husband tried to call him day after day with no return call or answer. Long story short, after all appeals were exhausted they ruled against my husband. Now we are going to have to pay it all back. I want it paid off in 2011 so we can take it OFF of our taxes for 2011. It’s all pretty ridiculous.

  6. Can I still collect my unemployment benefits if imarry someone who is incarcerated ?