You do have to pay taxes on unemployment income. But just how you do that is a bit trickier.
TaxGlobal is here to answer three of your most pressing questions about unemployment and taxes.
1.Is my unemployment income taxable?
Yes, anyone and everyone who receives unemployment must pay federal (not necessarily state) taxes on that money. Just how much you pay depends on your tax bracket and amount of taxable income.
In terms of state taxes, you may or may not have to pay. If you live in a state with no income tax, you won’t have to. But if you do live in a state with income tax, you should look up the specific requirements in your state. For example, Michigan does tax unemployment, whereas California doesn’t.
2.How do I pay taxes on my unemployment?
If you pay regular income tax, the money is withheld from your wages, based on information you give to your employer using Form W-4. This way, you pay your taxes bit by bit throughout the year.
You can also have your taxes withheld from your unemployment income, but this won’t happen unless you specifically set it up. If you do, you’ll have 10% withheld from each paycheck. That may or may not cover all your taxes, but it will at least let you pay some of the amount as you go.
If you haven’t already set this up, you can fill out Form W-4V and send it to your state’s unemployment office. You can also catch up on what you haven’t paid yet this year via estimated taxes, which are paid quarterly. In fact, if you don’t want to have taxes withheld from your paycheck, you can simply make quarterly estimated payments.
3.How do I file taxes on my unemployment?
If you get unemployment, your state should send you Form 1099-G in January or February. This form shows how much unemployment compensation you received over the year, and will help you fill out your tax return.
When you file your federal return, follow these steps:
Include your unemployment as income by entering the amount from Form 1099-G Box 1 on line 7 of Schedule 1 (Form 1040), Additional Income and Adjustments to Income.
Enter the amount of tax withheld (from Form 1099-G Box 4) on line 25b of your Form 1040 or Form 1040-SR.
Then, simply attach Schedule 1 to your federal tax return and you’re good to go.