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The unemployment rate dropped to 7.6% in March 2013, which is good news, unless, of course, you’re included in that rate.
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But if you receive unemployment benefits (also called, depending on the jurisdiction, unemployment insurance or unemployment compensation), or received unemployment benefits in the previous year, you should be aware of the IRS requirements and tax treatment.
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In a nutshell, if you received unemployment compensation during the year, you must include it in your gross income.
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According to the IRS, unemployment compensation includes:
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- Amounts received under the laws of the United States or of a state,
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- State unemployment insurance benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund,
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- Railroad unemployment compensation benefits,
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Unemployment compensation does not include:
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- Workers' compensation payments;
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- Supplemental unemployment benefits received from a company financed fund are not considered unemployment compensation for federal tax purposes. These benefits are wages subject to income tax withholding, and may be subject to social security and Medicare taxes as well. Supplemental unemployment benefits should be reported to you on Form W-2;
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Unemployment benefits from a private fund (or, in some cases, public fund) to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. This taxable amount is not unemployment compensation; it is reported as “Other income”.
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Washington DC
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tel/fax 202 350-9002 |
Unemployment Benefits
and Taxes
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Troubles viewing this message? View in browser online here
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Generally speaking, any employees (including those working for the government and service members recently discharged honorably from active military duty) are entitled to file insurance claims for state unemployment benefits when they suffer a reduction in work hours or lose their jobs through financial cutbacks, plant closings or mass layoffs.
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The U.S. Department of Labor oversees the Unemployment Insurance System at the Federal level. States are allowed to create their own unemployment laws, rules, regulations and programs that meet or exceed the same at the Federal level.
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Consequently, unemployment laws and regulations (including eligibility requirements, “base period”, number of weekly payments, maximum amounts, etc.) vary by state and are usually administered by the unemployment offices that are typically divisions of state labor departments or other employment-related agencies.
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But, as long as they are included in the IRS description of unemployment compensation, you have to pay federal taxes on your unemployment benefits at the same rate as the rest of your income for the year.
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The argument for taxation of social welfare benefits is that they result in a realized gain for the taxpayer. The argument against taxation is that the benefits are generally less than the federal poverty level.
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Nevertheless, unemployment compensation has been taxable by the federal government since 1987.
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The IRS requires you to include your benefits in your gross income along with any wages you earned while employed or that your spouse earned if you file a joint return, along with bank interest, stock dividends and other sources.
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If you think it is necessary and helpful for your particular situation, you can instruct your unemployment benefits agency to withhold a portion of your benefits from each payment by completing Form W-4V, Voluntary Withholding Request.
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The withholding rate is automatically 10% of your weekly benefit amount. Many states that tax unemployment benefits allow you to also sign up for withholding of the state tax percentage from your unemployment check.
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At the beginning of the year you should receive a Form 1099-G, Certain Government Payments, that will show the amount you were paid and the amount of any federal income taxes withheld from your payments. You must attach the 1099G to your tax return and enter the amount on the appropriate line of your tax form.
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Even if the government taxes unemployment compensation at the same rate as regular income, you should not report it along with wages or self-employment earnings. You should report your unemployment benefits on Line 3 of Form 1040EZ, Line 13 of Form 1040A or Line 19 of Form 1040.
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