Are Unemployment Payments Taxable?

Written by Nickel - 8 Comments

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With all of the layoffs that are currently taking place, I thought I’d spend a few minutes talking about whether or not unemployment benefits are taxable. In short, they are. Because unemployment payments are technically classified as income, you have to pay income tax on them. Sucks, huh?

Here’s the answer straight from the IRS (see Topic 418 for more details):

Unemployment compensation is includible in gross income. You must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.

If you receive unemployment at some point during the year, you should received Form 1099-G showing how much you were paid. Oh, and if you don’t make a “voluntary withholding request,” you might have to make estimated quarterly tax payments to avoid an underwithholding.

Published on March 6th, 2009 - 8 Comments
Filed under: Taxes, Working
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. Yep! I found this out this year – thankfully, since the government WANTS your money, they send out their 1099s pretty quickly. Also, thankfully, most states offer you the option when you request unemployment benefits to either have the taxes taken out or not to.

    Although I highly, highly recommend people have the taxes taken out, I did not in 2008. Run the numbers – I was lucky in that I still got an enormous refund this year, but I know others may not be so lucky.

    Comment by Amphritrite — Mar 6th 2009 @ 1:11 pm

  2. Ugh… I hate this rule. Here is what I don’t understand. Through your employment you and your employer pay unemployment insurance. So my question is, how can it be both insurance and income? I am under the impression that I don’t get taxed on anything my health insurance reimburses me on (unless I missed something). Same idea, right?

    Comment by Kristen — Mar 6th 2009 @ 1:40 pm

  3. I think the rules vary by state, in California you don’t pay state income tax on unemployment funds. Only to the feds, I can’t guarantee other states have the same rules. I know the benefits and details vary greatly from one state to the next.

    Comment by Miss M — Mar 6th 2009 @ 10:31 pm

  4. Kristen: Employees do NOT pay into unemployment insurance – there is never a deduction taken from an employee’s paycheck for it. UI is funded by employers who pay taxes. Calling it unemployment insurance makes it confusing, In some states it’s called unemployment compensation. Hope this helps.

    Comment by also no job — Mar 6th 2009 @ 11:09 pm

  5. Part of the stimulus bill was supposed to forgive some amount of taxation of UI benefits, up to $2400 of UI benefitsI thought I heard?

    What I wonder about is this another case of double taxation? Was my employer paying post-tax dollars to unemployment, and now I and getting these funds and having to pay taxes on them too? I am having taxes withheld since I don’t know how long I will be unemployed.

    Comment by Danielle — Mar 8th 2009 @ 7:35 pm

  6. Don’t worry folks, the gov’t will make sure you get all your hard earned “tax” payments back…

    Comment by thomas — Mar 9th 2009 @ 2:06 am

  7. Another example of the Obama forked tongue. He said, “Unemployment insurance would not be taxed in 2009.” Then when the actual law comes out it’s only the first $2,600 that is not taxed. In NJ max UI is $584 plus the stimulus $25 is $609. If you collect all year that’s $31,668, and a whopping $2,600 is not taxed. Wow, big deal let’s all kiss the Misssiah’s ring. Thanks Big Guy, you’re a real sport.

    Comment by Jimmy — Mar 27th 2009 @ 6:02 pm

  8. Mauobama is a joke with his typical professorial/lawyer double-speak They are all slimy lawyers that say a lot of nothing to keep their “jobs.” That is what the dopey americans fall for. Imbecilies, lackies, and do-nothings part of the reason why usa is in such bad shape. They want a cut of any and all money you make so they can pay for all the programs, political pay raises, pensions, OT, benies, obama’s limo, food, servants, chefs, etc…. complete govt. waste. Those work-addicted baby boomers are part of problem too, their greed and work-addiction has screwed this country permanentely. The employers continually terry nickel and dime you as the working suckers die a slow death by toiling away for years in some corporate dump.

    Comment by Tom — Jun 30th 2009 @ 12:48 pm

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