If you are receiving unemployment compensation, it’s important to understand how it can affect your taxes. You may still have to file a tax return even if you are not earning income, and you may qualify for certain tax breaks as well. With thousands of taxpayers receiving unemployment compensation due to economic challenges, we want to address these frequently asked unemployment tax questions.
Do I have to file taxes if I’m unemployed?
It depends on your circumstances. You may have to file taxes if your income, filing status, and gross income meet certain requirements. Use this IRS tool to confirm if you’re required to file a tax return.
If you don’t have any taxable income to report when you file, chances are your return will be rejected by the IRS. However, TaxSlayer has workarounds to enable filing without taxable income. Learn how to file a return like this with TaxSlayer.
Have you picked up a side gig since becoming unemployed? If you drive for Uber or DoorDash, or sell products as an independent consultant, you may be considered self-employed for tax purposes.
Learn more: Different Types of Self-Employment.
Do I have to pay taxes on unemployment?
Your unemployment compensation is considered taxable income by the IRS (and most states, too). If your total income for the year – including what you get for unemployment – is more than the minimum amount required to file, some of it could be taxed.
To make sure you aren’t surprised with a tax bill when you file, you can have taxes withheld from your unemployment income during the year, or you can make estimated payments – it’s your choice.
To have income withheld from your unemployment compensation during the year, fill out Form W-4V, Voluntary Withholding Request. Use the Tax Withholding Estimator to calculate what you’ll need to have withheld.
What do I need to file unemployment taxes?
You should receive Form 1099-G from your state showing the total amount of unemployment income you need to report. If you were employed for any amount of time during the year, you will also need your W-2 from your former employer.
Have you picked up a side gig, like driving for Uber, tutoring, or selling a product as an independent consultant? If so, you may be considered self-employed for tax purposes.
Learn more: Different Types of Self-Employment.
Are there tax breaks for unemployment?
The Earned Income Tax Credit (EITC) is one tax benefit that many people may overlook. It is intended to help taxpayers with low to moderate incomes. The amount of credit you can receive depends on your filing status, total income, and how many qualifying children you have.
If you are paying for childcare while you look for work, you could receive a tax credit to offset those costs. The amount you can claim for the Child and Dependent Care Credit depends on your income.
For the EITC and the childcare credit, you must have earned income to report on your return. Your unemployment compensation does not count toward these since it is not “earned.” But if you lost your job during the year, you can still qualify based on what you earned while you were still employed.
If you have dependents under age 17, you may be able to claim the Child Tax Credit. You do not need to have earned income to qualify for this credit, but your dependents will have to meet certain requirements to be eligible. If you claim anyone 17 years old or older, they may qualify for a separate dependent credit worth $500.
Have you picked up a side gig, like driving for Uber, tutoring, or selling a product as an independent consultant? If so, you may be considered self-employed for tax purposes.
Learn more: Different Types of Self-Employment.
Will I have to pay taxes if I file a tax return?
Filing a tax return does not always mean that you will owe taxes. It does let the IRS know about your annual income, your life situation, and any deductions and credits you qualify for. That is why you must file a tax return to receive a tax refund (if you’re owed one).
How can I check on my unemployment tax refund?
The 2021 American Rescue Plan retroactively offered an exclusion of $10,200 on unemployment income for 2020 tax returns only. While this exclusion does not translate to a dollar-for-dollar refund, the exclusion may have adjusted your return resulting in an increased tax refund. The exclusion can only be applied to unemployment compensation on 2020 tax returns. This exclusion cannot be claimed in the following tax years, as it has only been extended to 2020 tax returns.
If you were eligible for this exclusion, the IRS automatically recalculated your return with the correct amount of taxable unemployment income and tax. Taxpayers impacted by this exclusion should have received a letter from the IRS to inform them of the change to their return and the amount of unemployment tax refund. If you had any outstanding tax liabilities, the IRS would have applied the refund to your remaining balance. If you did not have an unpaid tax bill, the IRS would have issued an additional refund for the overpayment. If you believe you are eligible for the exclusion, but the IRS did not correct your return, you may need to file an amended return for tax year 2020.
Suppose you have yet to receive or cannot find the notice from the IRS regarding your unemployment tax refund. In that case, you can get the most updated information on your tax records by logging into the IRS Online Account or requesting to have a copy of your tax transcript mailed to you. Get the IRS answers to frequently asked unemployment tax refund questions here.
What happens if I owe taxes but am unemployed?
Depending on your specific tax circumstance, it is possible to have tax liability even while unemployed. If you have concerns about paying your tax bill by the due date, contact the IRS as soon as possible. You can work with the IRS to set up a payment plan and discuss ways to avoid additional penalties and fees.
What happens if I don’t file my unemployment on my taxes?
State agencies report unemployment compensation to recipients, as well as the IRS, on Form 1099-G. The IRS keeps a record of the tax forms issued to taxpayers. If your return does not match the IRS records, they may indicate a discrepancy by rejecting your tax return submission. You should report all forms of income on your tax return to ensure your income tax is calculated accurately.
