Claims for unemployment are at a 44 year low with just 1.88 million people receiving benefits. If you’ve recently lost your position within a company, don’t feel disheartened.
The fact that claims are so low means the economy is doing well and you should find a new job quickly. However, in the meantime, unemployment benefits are there to help you bridge the gap between positions.
One question we get asked often is, does unemployment count as income? The short answer is yes.
Read this guide to find out what your tax liabilities are when you receive unemployment.
Does Unemployment Count as Income?
If you receive unemployment benefits, it counts as income. However, if you return any of the money you receive, you can reduce your tax liability.
Federal Income Tax
If you receive unemployment benefits during a tax year, you will receive a 1099-G form. You will need this form to report the total amount of benefits received.
This form will also state if you had any of your tax liability withheld. Having your taxes withheld will reduce the amount you owe when you file your taxes.
These benefits are not the same as unemployment benefits you receive from your company financed fund. These are considered regular income, and you’ll get a W-2 reporting these payments.
A third option is receiving benefits from a fund that you contributed to. In this case, you only have to pay taxes on the money that you receive that exceeds the total amount you contributed to the fund.
Form 1099-G
Your state will issue you a 1099-G that outlines the benefits you received for the taxable year. Look to Box 1 to find out the total amount of benefits you are liable for.
If you choose to have benefits withheld, you’ll see your federal tax withholdings in Box 4. If you also had state taxes withheld, those are located in Box 11.
Reporting Unemployment Income on Your Taxes
When you file your taxes, you will report your unemployment along with any other income you receive for the year. It’ll be a separate line item from your other forms of income.
Be sure to keep all of your tax forms for your records. If for any reason the IRS has a question about your return, you’ll need these forms.
Earned Income Tax Credit
The EITC is a federal refundable tax credit that’s dependent on the individual or couple’s income level. It’s aimed at helping those with low to moderate income. You need to meet certain criteria to qualify.
While unemployment benefits can get taxed, they don’t count towards your earned income. This means they don’t qualify towards your EITC qualifications. You need to receive wages during the year to qualify for this credit.
State Income Tax
In addition to your federal tax liabilities, many states also have a state income tax. If your state has an income tax, you’ll need to pay both the federal and state taxes.
Florida
If you live in Florida, you don’t have to worry about a state income tax. Instead, there is a 6% sales tax on the goods that you buy.
File your federal income taxes as you normally would and claim your unemployment benefits. You don’t need to file with the state.
Washington DC
You will need to pay both federal and state income taxes when receiving benefits in the District of Columbia. Be sure to check with your tax professional about reciprocity agreements with Virginia.
You shouldn’t be double taxed by having to pay both state’s income tax. Typically, those that live in one location and work in another only have to pay income tax in the location that they live.
If you pay income tax in Washington DC, you’ll fall into one of five tax brackets. Your income tax rate could range from 4% to 8.95%.
If you pay income tax in Virginia, you’ll be subject to their progressive tax rate system. You can use their online calculator to determine your amount of tax liability.
Maryland
You must report the unemployment benefits you receive in Maryland as a part of your gross income. You will then pay both federal and state income taxes on the total of the benefit. Recipients can elect to have both, neither, or just one of their income tax liabilities withheld from their benefit payment.
Utah
For those working in Utah, there is a flat state personal income tax of 4.95%. Your unemployment benefits are subject to state income taxes. You can opt to have both your federal and state income taxes withheld.
New York
For those receiving unemployment benefits in New York, you must pay federal, state, and local income tax. Your federal and state taxes can be withheld from your checks.
Your state liability for income tax is 2.5%.
Your Unemployment Income Tax Questions Answered
So does unemployment count as income? The short answer is yes, it does. While it doesn’t count towards your earned income total, it does count towards your total amount of income received for the taxable year.
Depending on the state you live in, you may need to pay both federal and state income taxes. To make your life easier, you can have one or both withheld from your weekly benefits checks.
While we strived to answer as many questions here as possible, everyone’s situation is different. It’s best to speak to a tax professional about your unique situation. They can answer specifics and ensure you comply with both federal and state law.
Contact our office today and let us help you with all of your tax questions.
