An unemployment benefit is a type of financial assistance offered to those who cannot find gainful employment for no fault of their own. Although unemployment benefits vary from one state to another, most states in the U.S. provide up to 26 weeks of financial assistance to help one deal with unemployment crises.
In some rare situations, the unemployment benefits may extend beyond 26 weeks. The extended benefits are usually offered during times of high unemployment, such as the Covid-19 pandemic. That said, the specific circumstances of unemployment play a huge role in determining the eligibility for unemployment benefits.
Unemployment benefits in California are not subject to state taxes, but they are taxable at the federal level. The Internal Revenue Service (IRS) treats these benefits as regular wage income, taxing them according to the recipient’s total annual income. However, there are ways to limit tax liability on these benefits, such as withholding taxes and applying for tax credits.
Like any other earned income, unemployment benefits are subject to federal tax returns because the IRS treats them like a regular wage. That said, California does not impose taxes on unemployment benefits.
Unemployment benefits are taxed at the federal level based on the income range. The total income is considered for taxation purposes, including your unemployment benefits and other sources of earnings in the financial year. The income bracket and the tax rates are mentioned below for single tax filers:
|Total Taxable Income||Tax Rate|
|Up to $9,950||10%|
|Between $9,951 and $40,525||12%|
|Between $40,526 and $86,375||22%|
|Between $86,376 and $164,925||24%|
|Between $164,926 and $209,425||32%|
|Between $209,426 and $523,600||35%|
The California Employment Development Department will automatically send Form 1099-G in the mail by January 31st, which will show the unemployment benefits paid to you (in ‘box 1’ of the form). It will also show the amount withheld for tax.
You must add the amount shown in the form to any other taxable income earned during the year, such as dividends, wages, interest, etc. Based on your financial situation, Form 1040 or Form 1040-SR can be used to file federal tax returns.
You must mention the unemployment benefits in the ‘unemployment compensation’ section on the applicable tax form. Once you complete the rest of the form, you can file the tax return electronically or by mail.
If you do not receive the 1099-G Form by the end of January, you can call the state’s unemployment office to request the form to be mailed to your address. You can also access the form online at the state’s unemployment website.
There have been instances of fraud where criminals have filed for unemployment benefits using stolen identities. Those who have received Form 1099-G without unemployment compensation must report the issue to the tax authorities.
In the income tax form, you should only mention the amount you received in that financial year, even when waiting for the corrected 1099-G Form. In the tax form, don’t show the unemployment compensation not received by you.
The IRS guides fraud victims regarding the steps to be taken to resolve the issue. Such taxpayers are usually suggested to consider the IRS Identity Protection PIN program, which helps prevent scammers from filing returns in someone else’s name.
The most sensible way to limit tax liability on unemployment benefits is to have the taxes withheld from your weekly receiving. To initiate the tax withholding process, you must fill out and submit the W-4V (Voluntary Withholding Request form). Once the state’s unemployment office receives and accepts the form, 10% of your weekly payment will be held for tax payment purposes.
Depending on your financial situation, you can change your withholding. This is to say that you can choose not to withhold the payment at certain times when you need dire cash. You can also opt to change your withholding on a biweekly basis. It’s a good practice to change your withholding only if your financial situation changes so that you can avoid a large tax bill at the time of filing your tax returns.
You can estimate the amount you owe towards taxes using a worksheet or tax software and make quarterly payments to reduce the tax burden. Upon fair tax estimation, you can make up to four quarterly payments electronically. As an alternative, you can also mail a check to the IRS. Irrespective of the payment method you consider for tax payment, it must be accompanied by the 1040-ES Form.
The federal government provides some room for tax credits, which can be utilized to lessen the tax burden owed on unemployment benefits. For instance, you can claim a Child Tax Credit on dependent children. If you pay for educational courses to improve your job skills during unemployment, you may be eligible for a Lifetime Learning Credit.
You can deduct some job search-related expenses to reduce the tax liability on unemployment benefits. Ideally, you must keep a detailed record of all the deductible expenses directly related to your job efforts. It’s important to know that not all job search-related expenses are deductible.
You can typically deduct expenses not reimbursed by any potential employer, such as traveling expenses related to job interviews, resume preparation costs, fees charged by employment agencies, and things along the same lines. If you switch careers, job search expenses won’t be considered deductible expenses.
Depending on your tax situation, you could end up with no taxes to pay by considering the suggestions above. You might owe taxes, but it won’t be a large bill, which will eventually be worth the peace of mind.
In all scenarios, it helps to be fully aware of our tax obligations to avoid trouble with the law. At the same time, it’s important to educate ourselves regarding the possible deductions and tax credits to minimize our tax liability.
If you have any complex doubts about the taxation of unemployment benefits on your tax return, it’s advisable to consult a tax professional to ensure compliance with the current tax regulations.