The past few years were unique and difficult year for many reasons. One group in particular was hit hard – American workers, especially those who lost their jobs directly or indirectly due to COVID.
Fortunately the government acted and put in several enhanced benefit programs to provide unemployment benefits and support this group of Americans.
But come a new year, cometh the tax man! So the IRS and local state agencies sent a friendly reminder as they do around this time to the millions of Americans receiving unemployment compensation, many of them for the first time, that there unemployment payments (including those under PUA, PEUC, FPUC and LWA) are considered taxable payments.
While many were able to have tax withheld from their benefits when they filed a claim and received payments, many also chose not to withhold taxes to get a few extra bucks in hand.
However this group could face a pretty significant tax bill given that the enhanced unemployment insurance (UI) benefits paid were much higher than regular incomes for nearly 50% of Americans.
IRS Guidance on Unemployment Compensation
By law, unemployment compensation is taxable at state and federal levels and must be reported on your tax return as earned income.
You can opt to have state and federal taxes withheld from your unemployment payments at time of receipt (just like you can do on your paycheck).
If you decide to have taxes withheld, your state UI agency will generally deduct a flat 10% for federal taxes. State taxes are different as the treatment of unemployment benefit taxes vary at state by state level.
Some states don’t tax them at all (because the state doesn’t have an income tax) like Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming; while a couple of states will only tax part of your benefits e.g. Indiana and Wisconsin.
There are states like specifically exclude state taxes on unemployment payments – Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia.
Other states however tax the full unemployment payments like they would regular income.
While withholding for UI benefits is voluntary at federal and state level, some states do this by default unless you advise them not too.
In others you may to explicitly make this choice to have taxes withheld. So pay attention to this when filing your unemployment claim as you will be asked and reminded to review your tax withholding elections.
Why withholding taxes on your weekly unemployment check can be a good idea
While you’re not required to have federal or state taxes withheld from your unemployment “check,” many experts say it’s a good idea to go ahead and do so because taking a small hit on a weekly or bi-weekly basis is much better than taking a big hit when you go to file your taxes and realizing you owe the IRS a lot of money at the time of filing.
E.g. $30 p/week deducted for taxes is better than potentially than up to $1500 in one hit at tax time. And because all state and federally funded unemployment payments are reported to the IRS you cannot avoid taxes.
Your state UI agency will manage your tax withholding needs and if you choose to withhold taxes then federal law allows UI recipients to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability.
To do that, fill out Form W-4V, Voluntary Withholding Request PDF, and give it to the agency paying the benefits.
Don’t send it to the IRS. If the payor has its own withholding request form, use it instead. If a recipient doesn’t choose withholding, or if withholding is not enough, they can make quarterly estimated tax payments instead.
This may be applicable to small business owner, high wage earners (prior to job loss) or freelancers whose income is variable but were able to collect Pandemic unemployment assistance (PUA) this year.
How Will I Know How Much I Owe in Unemployment Taxes?
In January, unemployment benefit recipients should receive a Form 1099-G, Certain Government Payments from the state UI agency or department paying your unemployment benefits.
This form will show the amount of unemployment compensation they received during the year in Box 1, and any federal income tax withheld in Box 4. Taxpayers report this information, along with their W-2 income, on their tax filing.
Most leading tax software packages like Turbo Tax provide free or low cost options to file your taxes and calculate your unemployment taxes, while aiming to get you the biggest refund possible. So recommend using them for your tax filing.
You can also use the IRS tax checking tool to determine if your unemployment payments are taxable (based on your income and filing status).
When Will I Get My 1099-G Tax Form?
1099-Gs are required by law to be mailed by January 31st for the prior calendar year. So you should get yours by January 31, 2024, for tax year 2023.
You should check your state’s UI website and process for getting a replacement form if you didn’t get one. See other key tax season processing dates.
What if I got a 1099-G form Even Though I didn’t File For Unemployment (Potential Fraud)
Given the surge in claims and all the new unemployment programs this year there have been many fraudulent claims (and scams) to apply for the enhanced benefits which had very lax rules when initially rolled out, especially the PUA program.
This has mean that many people have received Form 1099-G for unemployment benefits from their state UI agency (they issue 1099-G forms) when they did not actually apply or get any benefit payments.
If this happened to you, its likely a sign of of identity theft and you need to contact your state agency asap to get this corrected. If you don’t you will be on the hook for state (if applicable) and federal taxes!
Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received. A corrected Form 1099-G showing zero unemployment benefits in cases of identity theft will help taxpayers avoid being hit with an unexpected federal tax bill for unreported income.
Is Unemployment overpayment taxable
Yes. Both at a state and federal level. Further you could also be required to repay any overpayment of unemployment benefits.
Pandemic Unemployment Taxes Exclusion
Under the Biden Stimulus (ARP) package which funded another round of unemployment benefit extensions, there was a late provision added that provided a tax break on unemployment insurance (UI) benefits.
This tax break exempted the first $10,200 in unemployment benefits/compensation received in 2020 (not in 2021). For married couples, this amount would be $20,400.
This exemption went a long way to prevent the surprise unemployment income tax hits many jobless American households saw when filing their 2020 tax return in 2021.
It was not extended for the 2021 and following tax years, where the pre-COVID tax rules discussed in this article were back in effect.