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How Does Unemployment Impact Taxes?

Written by prositesfinancialMar 29 • 2 minute read

Unemployment benefits are a financial resource for people who lose their jobs. However, the IRS and some state authorities consider unemployment benefits taxable income. It is best to pay your unemployment taxes to avoid problems with tax authorities. When it comes to your unemployment and taxes, you may have lots of questions. Keep reading to know how unemployment impacts your taxes.

Is Unemployment Taxable? 

Yes, your unemployment benefits are taxable. The IRS requires unemployed individuals to report any unemployment income on their federal tax return using Form 1099-G. Most states will also tax unemployment income, except for a few that do not tax any unemployment income. You can check your state’s department of revenue to determine whether your unemployment income is taxed at the state level.

How Are Unemployment Benefits Taxed?

All unemployment benefits are partly intended to replace your normal wages. Therefore, the IRS considers your unemployment benefits as taxable income. Your tax bracket and overall tax situation will determine whether you pay taxes on your job loss benefits and at what rate. You’ll receive Form 1099-G showing the amount of unemployment income you received and the withheld taxes from the state that pays your unemployment benefits.

How Do I Pay My Unemployment Taxes? 

As you apply for unemployment benefits, you can request that state agencies withhold your federal taxes. 10% of what you get from the checks will be used for paying federal taxes. You can also choose to make estimated quarterly tax payments all year round. If you choose the latter, ensure you know the deadlines for each quarter. You can also pay all your taxes during annual tax time. You can use any of these three options to pay your state taxes.

Will My Unemployment Impact My Tax Credits? 

Receiving unemployment benefits may impact your eligibility for some tax credits. For example, the income earned will determine your eligibility for the child tax credit and earned income tax credit. Unemployment income can lower your credit amount or disqualify your eligibility for credits because it is not considered earned income. Always consult your tax preparer to determine how unemployment affects your eligibility for tax credits.

What Happens If I Am Unable to Pay My Taxes? 

When you are unemployed, you are surviving on low funds and may need additional help if you experience issues during tax time. The IRS website has a free tax filing service that unemployed taxpayers can use. Volunteer Income Tax Assistance offers free tax preparation services for lower-income individuals. You can also opt for tax relief options if your tax problems are more substantial.

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