How to Handle Taxes on Unemployment Income

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Do You Pay Taxes on Unemployment?

Unemployment benefits can be a crucial financial support when you lose your job. However, unless you opt to have your taxes automatically withheld, you will need to set aside some of your benefits to pay taxes. Unemployment benefits are subject to federal income taxes and, depending on your location, state and local taxes as well.

The IRS taxes unemployment benefits as ordinary income. The rate you pay will depend on your total income, filing status, deductions, credits, and tax bracket. Federal income tax brackets range from 10% to 37%. Your income is taxed progressively, meaning you pay different rates on different portions of your income.

How Do I Report My Unemployment Benefits?

You’ll report unemployment benefits as income on your federal tax return. Around the end of January, you’ll receive Form 1099-G from your state unemployment benefits administrator. This form shows the total amount of unemployment benefits you received for the prior year. If you don’t receive a 1099-G, check your state unemployment agency’s website for payment information.

Use Schedule 1 and Form 1040 to report unemployment benefit income on your tax return. If you choose to have taxes withheld from your unemployment benefit payments, you’ll record your total withholding on your 1040 as well.

How to Pay Taxes on Unemployment Benefits

There are two basic methods to ensure your tax bill is covered:

• Have money withheld from your unemployment checks: You can request to have 10% of your benefit amount withheld from your payment and applied toward your federal income tax. This is similar to federal tax withholding on a paycheck. You may be able to request withholding when you apply for unemployment benefits or use IRS Form W-4V to submit your request to your unemployment benefits administrator.
• Pay quarterly estimated taxes: To avoid underpayment penalties, the IRS requires you to make quarterly estimated tax payments if you expect to owe $1,000 or more on your final tax bill. If you choose not to have taxes withheld from your benefit payments—or if 10% withholding might not be enough to cover the taxes you’ll owe—use IRS Form 1040-ES to estimate your tax liability and send quarterly tax payments to the IRS.

Whether you choose to have money withheld from your unemployment payments or pay quarterly estimates, you’ll calculate your final tax bill—and pay any remaining amount you owe—when you file your tax return. If you’ve overpaid throughout the year, you’ll receive the difference back as a tax refund.

What to Do if You Can’t Afford to Pay Your Taxes

Paying your tax bill can be especially challenging when you’re living on unemployment benefits. If you don’t have the money (or available credit) to pay, you can request a payment plan from the IRS that will give you an additional 180 days or up to six years to pay.

You’ll be charged a reduced late payment penalty plus interest for as long as you carry an IRS installment balance, but you’ll avoid collection consequences including seizure of assets. Setting up an IRS installment plan doesn’t require a credit check and won’t affect your credit score.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we understand that managing your finances can be challenging, especially during times of unemployment. If you need assistance with mortgage services, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey and find the best solutions for your needs.

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