Do you remember the Marx Brother’s “contract scene” in Night at the Opera? It started with Groucho reading, “The party of the first part, will be known in this contract as the party of the first part…” Chico said it was “no good.” He couldn’t say why, so he wanted to hear it again.
You may feel like you are experiencing this non sequitur when you find out that the government, who just paid unemployment benefits to feed you, asks some of it back in April of the next year. So, before sending them one of your frozen hams, you should know how these benefits are taxed:
Unemployment compensation generally includes, among other forms, state
unemployment compensation benefits, but the tax implications depend on the type
of program paying the benefits. You must report unemployment compensation on
line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.
Here are four tips from the IRS about unemployment benefits.
1. You must include all unemployment compensation you receive in your total
income for the year. You should receive a Form 1099-G, with the total
unemployment compensation paid to you shown in box 1.
2. Other types of unemployment benefits include:
- Benefits paid by a state or the District of Columbia
from the Federal Unemployment Trust Fund
- Railroad unemployment compensation benefits
- Disability payments from a government program paid as a
substitute for unemployment compensation
- Trade readjustment allowances under the Trade Act of
- Unemployment assistance under the Disaster Relief and
Emergency Assistance Act
For complete information on each of the benefits listed, see chapter 12 in
IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and
3. You must report benefits paid to you as an unemployed member of a union
from regular union dues. However, if you contribute to a special union fund and
your payments to the fund are not deductible, you only need to include in your
income the unemployment benefits that exceed the amount of your contributions.
4. You can choose to have federal income tax withheld from your unemployment
compensation. To make this choice, complete Form W-4V, Voluntary Withholding
Request, and give it to the paying office. Tax will be withheld at 10 percent
of your payment. If you choose not to have tax withheld, you may have to make
estimated tax payments throughout the year.
However, there may be a silver lining if you did not make enough money to pay taxes. Another possibility is that you over-withheld on compensation you earned before or after you received your benefits which ends up paying the taxes for the unemployment benefits.
As a planning tool, if you were unemployed early in the year, you should look into claiming no more than zero on your W-4 to withhold taxes. If that is not enough, you may want to withhold even more taxes in the year. To avoid planning may bring an unwelcome surprise with penalties in April.