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What you need to know about reporting unemployment benefits

Jo Willetts, EA

Director, Tax Resources

Published on: June 19, 2023

“Unemployment benefits” are financial assistance provided by federal and state governments to people who’ve been laid off from their jobs or are out of work. You most likely will have to pay taxes on that income. But not to worry, we’re here to help you understand how to report this income on your tax return. Keep reading to learn more.

Who’s eligible for unemployment?

If you’ve recently been laid off or lost your job due to factors beyond your control, you could qualify for receiving unemployment benefits. You would typically go through your state’s government website or labor department to apply for unemployment benefits.

The amount of financial assistance you could receive from unemployment depends on a few factors.

  • How long you were employed at your job
  • How much you earned while employed
  • The maximum benefit your state allows

What are the requirements for reporting your unemployment benefits?

  • If you’ve received unemployment benefits, you should be on the lookout for an IRS Form 1099-G (also called “Certain Government Payments”) to arrive by mail. The forms must be mailed no later than January 31, each year. On your 1099-G, you should look at Box 1 to find your total unemployment compensation received for that tax year.
  • If you did not receive your 1099-G when you are ready to file, you can log into your state’s online unemployment account (how you’ve most likely been certifying your benefits) to get the necessary information.
  • When it’s time to file your taxes report the amount of benefits, found in Box 1 of Form 1099-G, on Form 1040, Line 25b.

It’s important to keep all your tax documents handy, so that you’re set to complete the most accurate return and get your biggest possible refund.

Are taxes withheld from your unemployment benefits?

Not automatically, no. You do have the option to have taxes withheld (at a 10% rate) from your unemployment benefits, however. When you first register for your benefits on your state’s unemployment website, you should be able to choose to receive a partial payment after taxes are withheld, or full payment where there are no taxes withheld.

What is the purpose of IRS Form 1099-G?

This IRS form informs you of the total amount of unemployment compensation you received that tax year when it comes time to file your tax return.

If you receive Form 1099-G, but believe the benefits amount listed in Box 1 of the notice to be incorrect, there are steps you can take. You should reach out to your state’s unemployment department, and if there are any mistakes, they should issue you a corrected form and update the IRS.

What’s the difference between taxable and non-taxable benefits?

Unemployment benefits are taxable income for federal taxes. Which means you’ll need to report these benefits on your federal tax return. Some states consider unemployment compensation to be taxable, so you’ll need to report your benefits on your state return, too.

The IRS no longer automatically determines the correct taxable amount of your unemployment compensation, now that the American Rescue Plan Act of 2021, which authorized each taxpayer to exclude up to $10,200 of benefits for tax year 2020 only, has expired. Special case: If you accepted unemployment in 2020 and haven’t filed that year’s tax return yet, you could still claim a special tax break (up to $10,200) for those 2020 benefits when you do.

We recommend you file your return as soon as possible to avoid additional penalties and interest.

What about unemployment fraud and overpayments?

Fraud. Money fraud of any kind is a very serious issue that needs to be dealt with immediately. If you’re a victim of unemployment identity theft, you need to contact your state’s unemployment department right now. They will be the first to handle these corrections for you.

In the meantime, there are other important steps you should take if this happens to you.

  • Check your financial accounts and all credit reports for other fraudulent activity.
  • Go ahead and file your taxes on time to avoid penalties and added stress.
  • Report your correct unemployment income. A Jackson Hewitt Tax Pro can happily help you do this.

Take a breath. You can work this out. Act fast and be diligent.

Overpayment. Overpayment only occurs if you’ve received unemployment benefits that were not entitled to you. If this happens, be sure to contact your state’s unemployment department to address this and to avoid any future issues including fines and penalties.

Are there any available deductions and credits for unemployment benefits?

There is no tax credit or deduction for losing your job or receiving benefits afterwards.

Your income is generally lower during unemployment, which also lowers your income tax and may allow you to qualify for Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC), which could increase your refund.

To feel certain you’re getting the maximum deductions and credits when you file your taxes, don’t file alone. Having a tax professional in your corner is key to getting the refund you deserve.

Are there tax liabilities for receiving unemployment benefits?

The IRS considers unemployment compensation to be taxable income. You’ll need to report this money on your tax return to avoid IRS penalties. Failing to report accurately and on time could result in tax liabilities, meaning you’ll owe the IRS.

One last note to make about taxing this income. When you sign up for your benefits, you can choose to have taxes withheld from your unemployment compensation. If you choose not to have money withheld, another way to ease into paying taxes on your benefits is to pay quarterly taxes rather than one lump sum yearly. Paying quarterly taxes is popular with individuals who do not have this automatically withheld from their taxable income, such as freelancers or business owners.

Doing your taxes right isn’t exactly easy. But that’s okay, because we happen to love taxes, so you don’t have to. We’re open all year and here for all your tax needs. Come see us or give us a call.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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