If you lose your job or your employer lays you off, you may be able to get unemployment benefits.
The payments may be a welcome relief, but you should know that they are taxable.
Here are 5 important facts from the IRS about unemployment compensation:
1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G (Certain Government Payments) which will show the amount paid to you and the amount of any federal income taxes withheld.
2. There are several types of unemployment compensation and generally include any amount received under an unemployment compensation law of the U.S. or state. For more about the various types, see Publication 525 – Taxable and Nontaxable Income.
3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more that the contributions you made.
4. You can choose to have federal income tax withheld from your unemployment, use Form W-4V – Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.
5. If you are facing financial difficulties, you should visit IRS.gov. “What Ifs” for Struggling Taxpayers explains the tax effect of events such as the loss of a job. For example, if your income decreased, you may be eligible for some tax credits, such as Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.
For more details, see IRS Publications 17, your Federal Income Tax, or IRS Publication 525. You can download these booklets and Form W-4V and IRS.gov. You may also order them by calling 800-TAX-FORM (800-829-3676).