Unemployment Benefits, Job Loss and Taxes

Unemployment compensation is considered taxable income by the IRS and most states, thus you are required to report all unemployment income as reported on Form 1099-G on your income tax return. You should be mailed a Form 1099-G before January 31, 2022 for Tax Year 2021 stating exactly how much in taxable unemployment benefits you received. When you prepare your return on eFile.com, report your 1099-G and eFile will calculate the taxes owed on it based on how much you had withheld. e-File your 2021 Return online by April 18, 2022.

Unemployment and Income Taxes

Unemployment

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Is my unemployment taxable? How do I pay taxes on unemployment compensation?

Unemployment income is always considered taxable income. Apply for unemployment benefits online through your state unemployment website if you have lost your job. Due to the COVID-19 Pandemic, these benefits were enhanced and made easier to enroll in - see details below.

Important: The ARPA rules making a portion of unemployment nontaxable do not apply for unemployment benefits received in 2021. The Unemployment Compensation Exclusion rules for 2021 Tax Returns were updated on March 23, 2022.

Unemployment benefits can be directly deposited into your bank account on a regular basis. This taxable income will continue to come in as long as you are looking for work, unless stated otherwise by the state or federal government. After applying for and receiving unemployment benefits in any amount during a tax year, you will receive a Form 1099-G, Certain Government Payments, in January following the year. Use this form to prepare your taxes - when preparing your return on eFile.com, simply report the figures from your form when prompted and the taxes on your unemployment income will be calculated for you. Additionally, report your other types of income so it can all be added to your return. Your unemployment income is part of your regular income tax return.

This means that you will need to report all your income from the year on a single tax return. If you were employed prior to receiving the benefits and received income reported on Form W-2 or any other source, enter this form as well so taxes can be assessed. If you found work after receiving unemployment benefits, update your information so you no longer receive unemployment income you are not entitled to. At the end of the year, report your 1099-G, W-2, and any other income on your tax return.

Use your unemployment benefits to help you look for work by paying bills, rent, etc. Given the situation, try not to withdraw early from a retirement account as this will result in early withdrawal penalties - details below.

Unemployment adjustment and your AGI for 2021: If you received unemployment income during 2020 and reported this on your return before the American Rescue Plan Act made the first $10,200 nontaxable, your 2020 adjusted gross income or AGI may have been changed. When e-filing your 2021 Return in 2022, you will be prompted to enter your 2020 AGI. The IRS has confirmed that taxpayers will want to enter their original AGI from their Form 1040, not the adjusted AGI amount.

How to Pay Taxes on Unemployment Benefits

Tax Withholding in 2022: Generally, when you first apply for unemployment benefits, you are asked if you wish to withhold federal income taxes and/or state taxes from your benefits. If you do not withhold taxes from your unemployment benefits, you may owe taxes when you file your return. If you cannot pay your tax bill when you file, weigh the options of IRS tax payment plans and installment agreements.

If you think you will still receive unemployment benefits in 2022, start and estimate your 2022 Income Tax Return first and factor in the unemployment benefit payments or income. If you see a result of large tax refund, you should start withholding taxes from your unemployment benefit payments or other income you might have (W-2 from wages, 1099 income, etc.). Based on the estimated tax return results, you might want to have 10% withheld for IRS or Federal taxes. To do so, complete the Voluntary Tax Withholding Request Form W-4V and submit to your state tax agency (click your state and scroll to the bottom for the state agency address). The state agency will then withhold federal income taxes from your unemployment benefit payments. Alternatively, you can also submit Form 1040-ES with quarterly tax estimate payments - FileIT - or pay your IRS taxes online.

Sample Payment Types to Check Tax Withholding on:

  • Disability benefits paid as a substitute for unemployment compensation
  • Unemployment assistance under the Disaster Relief and Emergency Assistance Act of 1974
  • Unemployment assistance under the Airline Deregulation Act of 1978 Program
  • Trade readjustment allowances under the Trade Act of 1974
  • Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
  • Railroad unemployment compensation benefits.

If you need to estimate other W-2 related W-4 based tax withholding, use the free eFile.com W-4 TAXometer.

Severance Pay and Other Compensation

Remember that any severance pay or unemployment compensation you receive is taxable, in addition to any payouts received for accumulated vacation or sick time. Be sure that enough tax is withheld from these payments and you receive your final W-2 from your former employer to use for your tax return. Companies are not required to send out W-2s right away, but must provide them to all employees (even former ones) by January 31 of the following year. If you have left the company, this would be the year after you leave.

Health Insurance and Job Loss

Did you know that a federal law, known as COBRA, requires your employer to allow you health coverage under their policy for up to 18 months after you are laid off? Note that the law doesn't cover firings for gross misconduct. COBRA is a continuation of health coverage policy that stands for the Consolidated Omnibus Budget Reconciliation Act. You must pay the full cost of the premium, plus an administrative fee. If you are healthy, check around as you may find cheaper premiums than what you would spend on a COBRA policy.

When you lose your job-based health insurance, compare rates from COBRA and the Marketplace. Weigh the pros and cons of each and decide on one that best suits your needs as a single taxpayer or a family plan, if applicable. COBRA gives you 60 days after losing your job to make this decision. You may qualify for a Special Enrollment Period if you miss the deadline for either COBRA or the Marketplace due to the pandemic. 

If you get a high-deductible policy, you can set up a Health Savings Account (HSA), which lets you make tax-deductible contributions and withdraw the money tax-free for qualified medical expenses. You will still need to report your health insurance coverage on your return in the year that you lose your job if you wish to claim the Premium Tax Credit. If your health insurance changes as a result of your job loss, or if you get another job, be sure to report any income changes or loss of health insurance to the Marketplace if you are claiming the Premium Tax Credit.

Using Retirement Savings For Expenses

If you withdrew from your retirement plan during the pandemic or other financial situation, find information below.

Losing your job is tough and you might be tempted to dip into your qualified retirement plan, IRA, or 401(k) account. Try not to do this if you can. If you cash in your retirement plans, you will pay tax on every dime you withdraw unless you have made after-tax contributions or you have certain extenuating circumstances. If you are under age 59 1/2 in the year you leave your job, you will also be hit with a 10% early withdrawal tax penalty. Make sure that you don’t jeopardize your retirement savings and compromise your long-term financial health.

However, if you have enough money in your 401(k) account, you can leave your money with your old employer where it will continue to grow. You may be better off transferring your 401k balance to an IRA where you would have almost unlimited investment options. You can request your old employer to send the money to the IRA. If you have the money paid to you with the idea that you will deposit it in the new plan, the law requires your old plan sponsor to withhold 20% of your money for the IRS. It's tough to roll over money that's been confiscated by the IRS.

You are also able to roll 401(k) money directly into a Roth IRA. I you want to use the Roth option, you must transfer your money to a regular IRA and then convert that account into a Roth. In either case, you have to pay taxes on the amount shifted to the Roth IRA, but all withdrawals after retirement will be tax-free. If part of your 401(k) is invested in your old company's stock, be sure to check out the special rules for net unrealized appreciation in IRS Publication 575 - Pension and Annuity Income, which could save you money.

Self-Employment

If you lose your job, you may decide to start your own business. New business owners should check out the information that the IRS provides for you in IRS Publication 334 - Tax Guide For Small Business. You should also review the tax implications of being newly self-employed and learn about the different kinds of 1099 forms.

View individual state pages for specific information and links to state government websites. Report your unemployment income when you file your 2021 Taxes. When you prepare your return on eFile.com, we will help report the information so you do not have to worry about how to file and how much is taxed.

COVID, Unemployment, and 2020 Taxes

The following information applies only for 2020 Returns. If you did not file your 2020 Return and report your unemployment benefits, do so now by filing back taxes. The Unemployment Compensation Exclusion will not apply to 2021 Returns.

Important Unemployment Exclusion Updates as of March 23, 2022

As of late May, 2021, the IRS has begun issuing adjustments as part of the American Rescue Plan Act - specifically, the Unemployment Compensation Exclusion - as supplemental, "plus-up" payments. The IRS identified millions of returns affected; taxpayers can expect to see any amount they are owed via direct deposit or a mailed check during the summer of 2021. You do not have to do anything to receive this refund if you are affected by this change. If, however, you are owed a refund but did not receive it, contact the IRS now. Details below. If you filed on eFile.com, see how your unemployment income may have been affected.

As a result of Stimulus 3 and the American Rescue Plan Act (ARPA), the taxation of unemployment income, benefits changed in reference to 2020 Federal returns.

  • The first $10,200 of 2020 unemployment benefits are nontaxable if the household adjusted gross income of the taxpayer is less than $150,000. When you file your 2020 return on eFile.com, this amount is calculated for you. The exemption applies to all the benefits related to unemployment income, regardless whether it was received under a traditional state program or the extra 2020 Stimulus related benefits.
  • For example, if you received $8,000 in regular state unemployment benefits, and $4,200 in $600 Federal Pandemic Unemployment Compensation weekly payments, you would have a total of $12,200 in benefits. You would exclude the first $10,200, and pay tax only on the remaining $2,000. This also applies to benefits received from Extended Benefits, Pandemic Unemployment Assistance (PUA), and Pandemic Emergency Unemployment Compensation (PEUC).

Important update regarding your 2020 Return(s):

  • If you eFiled your 2020 return on or before March 15, 2021 and reported unemployment income and you want to adjust your income taxes based on the American Rescue plan of March 12, 2021, you do not have to do anything. The IRS announced on March 31, 2021 that the money will be automatically refunded by the IRS during the spring and summer of 2021 to taxpayers who filed their tax return reporting unemployment compensation on or before March 15, 2021. The IRS will issue these payments in two phases: first to individual taxpayers affected, then to married filing joint taxpayers and/or those with more complicated returns.
    • The IRS has begun issuing these refunds as of May 10, 2021. There is no tracking nor lookup tool, but taxpayers may be able to see a scheduled transaction in their IRS account - see how to create an IRS account. Here, navigate to the View Tax Records on the homepage and click the Get Transcript button. In the dropdown menu, select Federal Tax, click Go, and you will land on a page displaying your IRS history - transactions, income tax returns, etc. Here, select 2020 Account Transcript and view the PDF that opens which displays all transactions from 2020 - 2021. You may see an entry titled Refund issued under the Transactions section - if this date is some time in late May or early June and it not your 2020 tax refund, this may be your UCE refund.
    • If you were issued a refund as married filing jointly based on the assumption that both you and your spouse received unemployment benefits (meaning the exclusion was $20,400 instead of $10,200), then you do not have to repay this as confirmed by the IRS if you believe you were not owed this much. If you were only entitled to the $10,200 exclusion, but received the $20,400 exclusion, you do not need to pay back half or even any of this nor do you need to contact the IRS or file an amendment.
  • If you e-Filed on or after March 16, 2021 and reported unemployment income, the eFile tax app will calculate all necessary adjustments, thus as a result you do not have to do anything else; more details below. An overview on how individual states are taxing unemployment income before and after the American Rescue Plan Act (ARPA) and if the IRS unemployment income tax exclusion applies to a state tax return or not. If so read these state income tax return amendment instructions if you e-Filed your 2020 state tax return(s) on or before March 15, 2021. Monitor here to see how your state(s) will handle the unemployment compensation exclusion in response to the ARPA.
  • Enhanced 2020 unemployment benefit payments were extended from September 6, 2020 to March 14, 2021, and then again until September 6, 2021, thus states will now provide 53 weeks of benefits, up from 23 weeks in 2020. However, many states ended this earlier than the September date. The unemployment benefits have increased by $300 per week as a result of the December 2020 second stimulus payment package. It is not too late to claim the first or second stimulus payment on your 2020 Tax Return if you never received them! See how to claim the Recovery Rebate Credit on your 2020 Return by filing a previous year return.

Over 23 million individuals had filed for unemployment during 2020. For the first time, some self-employed workers qualified for unemployment benefits. Get the details on the third stimulus payment.

The Pandemic Unemployment Assistance (PUA), which are additional unemployment benefit payments, also included self-employed, independent contractors or freelancers, and gig-economy workers. Essentially, these are unemployment benefits to those who are generally not eligible for regular unemployment insurance benefits. If you are self-employed with at least $5,000 a year self employment income and also have other employee based income through an employer, you might be disqualified from Pandemic Unemployment Assistance benefit payments, but you might be eligible for an additional $100 per week in unemployment benefits payments.

Unemployment
2020 Tax Return
Unemployment Benefits in 2020
Any unemployment compensation received during 2020 must be reported on your 2020 IRS Tax Return. Unemployment Benefits are taxable IRS income. You can no longer e-file 2020 taxes - prepare back taxes now and report your unemployment income. See the list below if unemployment benefits are also subject to state income taxes.
Unemployment Amount in 2020
Your State's Unemployment office should sent you a 1099-G by January 31 following a given tax year. If your state does not mail out Form 1099-G, see our state page and find how to contact the state or visit the state’s website. Box 1 will show the benefits received and Box 4 will show the federal income taxes withheld. This information will be reported on your tax return on eFile.com by following a simple tax interview.
Unemployment Compensation Tax Withholding
Contact your state unemployment office first to have taxes withheld from your unemployment compensation. Estimate your unemployment based tax withholding now for next year's return. Not all states tax unemployment income.
How to pay taxes due after Unemployment?
Option 1: You can make 1040-ES estimate IRS tax payments online. This way, you don't have to mail in the Form 1040-ES.
Option 2: Complete your W-4 Form once you have a new job and have taxes withheld that way. Use the eFile.com Paycheck Calculator or Withholding tool to determine our withholding amount. You can also complete the W-4 Form online before you mail it to your employer not the IRS.
Second Stimulus Payment and Unemployment
The basic criteria to file for and be approved for unemployment benefits is that you, through no fault of your own, lost your job or have been laid off. The COVID-19 Pandemic resulted in means to make it easier for taxpayers to receive unemployment benefits. 

How Did the Coronavirus Affect Unemployment?

Note: See information regarding COBRA, ARPA, and job loss.

As a result of the COVID-19 Pandemic and economic crisis, more than 36 million employees or taxpayers filed for unemployment benefits by May 2020. That number has steadily declined as Americans returned to work slowly. If you were or are a part of this group, these payments are taxable income to you and must be reported on your 2020 Tax Return, regardless of when you received them during the year. This includes your federal return as well as your state tax return.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, created a new, temporary federal program called Pandemic Unemployment Assistance, or PUA. Additionally, the Pandemic Emergency Unemployment Compensation, or PEUC, was created.

The PUA provided an additional 13 weeks of unemployment benefits to individuals not eligible for regular unemployment compensation or extended benefits, including those who have used up those benefits. This was given an additional 7 weeks, leading to a total of 46 weeks - originally 39. Individuals who can possibly get PUA include the self-employed (e.g. independent contractors, gig economy workers, and workers for certain religious entities), those seeking part-time employment, individuals lacking sufficient work history, and those who otherwise do not qualify for regular unemployment compensation or extended benefits.

While the PUA made it easier for more people to claim benefits while extending the time period, the PEUC served only as an extension of weeks. This extension was automatically applied, if applicable. The two acts were not applied at the same time and each expired at the end of 2020.

Unemployment benefits had been enhanced through July, providing up to an additional $600 per payment under the Federal Pandemic Unemployment Compensation, or FPUC. This amount is still taxable as it is part of your unemployment benefit package.

For state unemployment, the application and approval process for unemployment benefits varies by state. In most cases, in order to be approved for unemployment benefits, you must have been employed at your last job for a certain time period before you got laid off.

In most states, unemployment benefits are paid weekly for 26 weeks after the unemployment application and approval process. Some states offer different maximum weeks for unemployment compensation, such as Montana at 28 weeks or Florida at 12 weeks (see table below). For most states, extended benefits went into effect during the pandemic.

If you lost your job due to COVID-19 and enrolled in the COBRA program, you may be eligible to have your premium paid 100% by the government through September 30, 2021. As part of the March Stimulus Bill or American Rescue Plan Act, COBRA premiums are eligible to be covered by the government for those who enroll. If you were laid off from your job, consider enrolling in this program at least temporarily while you search for work and/or find health insurance via the Marketplace.

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