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When tax time comes around, you are required to file state and federal tax paperwork based on your income for the previous year. Typically, this requires filing based on your earnings at work. If your only income was from unemployment benefits, however, you may be confused as to whether you actually have to file. In most cases, unemployment benefits are still considered income by the IRS and still require a tax return to be filed.
Though the most common type of unemployment benefits are backed by an employer's unemployment insurance, other types of unemployment protection exist as well. State employees receive unemployment benefits from the state they were employed in, and some industries such as the railroad industry have their own unemployment protection packages available as well. Individuals who have lost their jobs as a result of natural disasters may qualify for unemployment benefits as part of an emergency relief plan from the government.
Not all unemployment benefits are counted as income by the IRS. If the unemployment benefits come from a private fund that you have paid into previously, the compensation you receive is only taxable if you receive more from the fund than you previously paid in to it. If you do receive more compensation than you paid in, the IRS still does not consider the taxable amount to be unemployment benefits; it should be included in the "Other Income" section of your tax form.
Unemployment and Taxes
If unemployment benefits are being provided by a taxable source such as unemployment insurance, you have the option to have a portion of your unemployment check withheld for taxes in the same manner that taxes would be withheld from your paycheck. If you choose instead to receive the full amount of your unemployment benefits, you will be responsible for making quarterly tax payments or paying any taxes due once the year is over and you have to file your income tax returns.
Filing taxes when you've only received unemployment benefits during the year is much the same as filing taxes if you've been working. You will receive form 1099-G instead of a W-2; this form shows both how much you have been paid as well as how much has been withheld from your unemployment payments if you opted for tax withholding. Your tax forms must be filed by the filing deadline, and any unpaid taxes due on your taxable income must be paid according to IRS requirements.
Not all states have income taxes, but those that do require taxes to be paid on unemployment benefits just as the IRS does. You can choose to have a portion of your benefits withheld in the same manner that federal taxes can be withheld, or you can pay the taxes quarterly or in a lump sum. State income tax rates differ from federal rates, so keep this in mind when setting up withholding or making tax payments.
Born in West Virginia, Jack Gerard now lives in Kentucky. A writer and editor with more than 10 years of experience, he has written both articles and poetry for publication in magazines and online. A former nationally ranked sport fencer, Gerard also spent several years as a fencing coach and trainer.