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.
Paying What You Owe
If you receive unemployment compensation in 2017, you will have to pay taxes on them in 2018. 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.
Start Preparing Early
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. If you can’t afford a professional, remember that if you file a 1040EZ, 1040A, or a simple 1040, may qualify for TurboTax’s free edition of their software, regardless of income.
How to Get a Rough Estimate
It is also possible to prepare yourself for the taxes you owe on your unemployment compensation 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.
The Bottom Line
If you are unemployed and you are unsure of what you will owe in taxes, it is a good idea to prepare your tax return as early as you can so you can explore your payment options, which include saving up for your tax bill, getting a loan to cover the bill, or signing up for a payment plan with the IRS.
Even if you can’t afford to pay your taxes, all is not lost. Working with the IRS is much better than avoiding the problem, and you can save yourself a great deal of money and heartache if you are proactive and prepared for the tax bill.