Sadly, a lot more taxpayers are trying to figure out the tax treatment of unemployment compensation these days… It’s helpful to understand a little bit of the history of unemployment compensation in order to understand how it functions (and how it’s taxed).
The Social Security Act of 1935, also known as Public Law 74-271, created the Federal-State Unemployment Compensation (UC) Program. You can probably tell by the date that it was a particularly tough time for many Americans. The economy was recovering from the Great Depression and unemployment was still high, at around 17%, though it had improved from a high of 25%. The Act, passed under President Roosevelt, was meant to help Americans transition out of the Depression and (hopefully) get back to normal.
That didn’t quite happen as quickly as anticipated and through the rest of the decade, Congress was still trying to stabilize employment and the economy. A big next step was the Federal Unemployment Tax Act (FUTA) of 1939, also known as Public Law 76-379. Since the original Act, there have been a few modifications including a 1976 bump in the tax which was extended in 1990, 1993 and 1997 (the extension became an annual event beginning in 2007).
These days, all states offer some kind of benefits for unemployment persons who qualify under state law. While FUTA is a federal law and is overseen by the Department of Labor, which is a federal agency, the actual unemployment compensation programs are administered at the state level. This means that states can set their own rules (within reason) for determining eligibility for unemployment compensation. Most states, however, stick pretty close to the federal rules and don’t choose to expand eligibility to more workers. That means that whether you qualify tends to rely on how much you earn; the kind of work you were doing; when and why you were separated or terminated and your willingness to go out and find new work.
To finance the state plans – and any additional benefits – most states impose an additional payroll tax over the federal tax. To get the most bang for their buck, as it were, a great majority of states have expanded their taxable wage bases higher than the federal taxable wage base. This has come in handy over the past couple of years when budgets have been straining to meet demand.
Benefits that are paid out under these plans are generally considered compensation for federal income tax purposes. Congress granted a bit of relief to taxpayers in 2009 by exempting the first $2400 in unemployment benefits from federal income tax but for 2010, things are back to normal: all unemployment benefits are includable on your federal income tax return in 2010.
Benefits are reported to taxpayers via a form 1099-G. If that form sounds familiar to you, and you’ve never received unemployment compensation before, it’s because the form 1099-G is used to report government payments, generally. That would include grants and state tax refunds (ahh).
Unemployment compensation is reported to you on line 1 of the form 1099-G; you’ll report it on line 19 of your form 1040, line 13 of form 1040A or line 3 of form 1040EZ. However, if you received too much unemployment compensation and had to pay it back in the same year, you’ll only report the net (meaning the amount you received less anything you paid back); note it as “Repaid” on your return so that the IRS doesn’t wonder why the numbers don’t match.
Some situations can make this a trickier situation than normal. Be sure and contact your tax professional if you repaid more than $3,000; received certain union benefits for unemployment; or have questions about how your payments are treated under state law.
Hello Tax girl,
My name is Kelly Maxwell. I live in NYC, in 2011 I received unemployment for most of the year and I did not take out for federal or state taxes; however, I did work a few temporary jobs. When I file my tax return this year, will the temporary employment be considered as earned income and will be added to the unemployment or will it be separate? I am wondering if the temporary employment will reduce my taxes.
Thanks,
Kelly Maxwell