“When you’re applying for unemployment benefits, you might not be thinking about whether any income you receive from the program is taxable — but you should.©iStock/Thinkstock
Losing your job is often a blow both financially and emotionally. At least you have unemployment benefits to help keep you afloat, right? But what about tax time? Will you owe taxes on those benefits? Knowing what you’ll owe and how you’ll have to pay keeps you from getting an unpleasant surprise at tax time.
Nothing’s a handout, and that includes unemployment wages, so yes — any compensation you receive as part of your state’s unemployment insurance benefits will be included as part of your gross income on your tax return. Ditto if you live in the District of Columbia, where your compensation comes from the Federal Unemployment Trust Fund. Severance pay and payment for unused vacation or sick days are also taxable. If you don’t have federal income tax held back, you’ll need to make quarterly estimated tax payments.
Some assistance programs are highly specialized but still taxable. For instance, workers in train and engine service who are prepared to work but are unemployed receive railroad unemployment compensation benefits. Under the Disaster Relief and Emergency Assistance Act of 1974, anyone who lost a job or business due to an extensive disaster and is not eligible for traditional unemployment benefits may receive payments. Also, workers who were impacted by foreign imports and no longer qualify for unemployment compensation get "trade readjustment allowances" under the Trade Act of 1974. And that is all taxable.
Certain private unemployment compensation is also considered income. If you get supplemental unemployment benefits from an account set up by your former company, that’s great — and taxable. In fact, you may have to pay Social Security and Medicare taxes, too. Some workers pay into private funds that are designated for unemployment compensation. The bad news is these are taxed, but the good news is you don’t pay if you receive less money that you deposited.
There’s more good news. Some state benefits, such as food stamps and state public assistance programs, aren’t taxed. Also, if you’re under 65 at Dec. 31, 2014 and your income drops below a designated amount — $10,150 for single filers and $20,300 for joint filers in 2013 — you don’t have to file federal tax returns at all [source: TurboTax]. But if you do file and itemize deductions, you can include specific job search expenses, such as travel costs, mail charges, employment agency rates and resume prep fees. However, you must be looking for work in the same field, and deductions don’t apply if you’re just out of college and unemployed.
Though paying taxes on unemployment compensation takes money out of the pockets of job-hunting workers, it beats the situation before 1935, when the Social Security Act set up the program. Before this, only Wisconsin had benefits for its unemployed citizens. Some private voluntary funds set up by businesses helped, as well. The modern public system covers far more people who need assistance during difficult periods.
Lots More Information
- How Unemployment Tax Benefits Work
- 10 Myths About IRS Audits
- 5 Tax Tips for the Unemployed
- How to Report Tax Deductions for Medical Expenses
- What is withholding tax?
- Internal Revenue Service. "Topic 418 – Unemployment Compensation." Aug. 19, 2014. (Oct. 29, 2014) http://www.irs.gov/taxtopics/tc418.html
- Price, Daniel N. "Unemployment Insurance, Then and Now, 1935-38." Social Security Administration. Oct. 1985. (Oct. 29, 2014) http://www.ssa.gov/policy/docs/ssb/v48n10/v48n10p22.pdf
- TurboTax. "Do I need to file a 2013 tax return with the IRS?" 2014. (Nov. 5, 2014) https://ttlc.intuit.com/questions/1901490-do-i-need-to-file-a-2013-tax-return-with-the-irs
- TurboTax. "10 Tax Tips for the Suddenly Unemployed." 2014. (Oct. 29, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Self-Employment-Taxes/10-Tax-Tips-for-the-Suddenly-Unemployed/INF12177.html
- U.S. Department of Labor. "Disaster Unemployment Assistance." July 12, 2013. (Oct. 29, 2014) http://workforcesecurity.doleta.gov/unemploy/disaster.asp
- U.S. Department of Labor. "Trade Readjustment Allowances." September 16, 2011. (Oct. 29, 2014) http://workforcesecurity.doleta.gov/unemploy/tra.asp
- U.S. Railroad Retirement Board. "Railroad Unemployment and Sickness Benefits." July 2014. (Oct. 29, 2014) http://www.rrb.gov/forms/opa/ub9/ub9.asp