Unemployment benefits are taxed depending on the type of program you are receiving the benefits from. Compensation amounts from unemployment include any income received according to either the federal or state laws of the United States. This compensation can include:
- State unemployment insurance benefits
- Benefits paid from the Federal Unemployment Trust Fund
- Railroad unemployment compensation benefits
- Disability compensation substitution
- Trade readjustment allowances as per the Trade Act of 1974
- Unemployment benefits as per the Disaster Relief and Emergency Assistance Act of 1974
What’s Not Considered Unemployment Compensation?
Unemployment compensation excludes the following types of income:
- Worker’s compensation payments
- Supplemental unemployment benefits originating from an employer financed fund. Instead, these benefits are treated as wages, and are subject to both income tax and Social Security and Medicare taxes. These types of benefits will be reported on a Form W-2 received from your employer.
- Unemployment benefits originating from a private fund in which you add money voluntarily. As such, they are taxed if you receive a greater amount than you contributed, although this amount is not considered unemployment compensation. It should be reported as “other Income” on line 21 of your Form 1040.
It’s important to include any unemployment compensation you received during the tax year as part of your gross income. You may have to make quarterly estimated tax payments, or you can chose to have federal tax withheld from your benefits. You will receive a Form 1099-G, Certain Government Payments, which will state the total amount of compensation you received. You can use this form to fill out your taxes and file an accurate return. Your tax preparer can assist you in determining how to report your unemployment compensation benefits correctly when filing your return.
