Unemployment benefits were first introduced in the U.K. in the year 1911. Two decades later, in the year 1932, the Unemployment benefits scheme was introduced in the US, in Wisconsin. The federal government of the U.S, then, through its Social Security Act of 1935, encouraged states to adopt and implement unemployment insurance schemes for the welfare of people. Since then, though there have been countless debates on whether the government should be paying these benefits, the U.S. government has continued to set-off a significant sum from its treasury as unemployment benefits for its citizens. However, without getting into that debate, let us go through a few must know facts about unemployment benefits.
1. Unemployment compensation is taxable
The compensation you received during the tax year when you were unemployed is subject to taxes. To help you file your taxes you would receive Form 1099-G, also called “Certain Government Payments”, containing information about the compensation the Government made to you and the taxes it withheld. You should receive the form by 31th Jan of any financial year during which you were unemployed.
2. The compensation is paid under U.S. or State Law
The unemployment compensation that you receive is paid to you under the U.S. or State unemployment compensation laws. If you wish to know more about unemployment compensation, you may refer to Publication 525, Taxable and Nontaxable Income, or speak with one our IRS tax experts.
3. Any Union benefits you receive may be taxable
If you received any Union benefits as an unemployed member of a Union, it is taxable and you need to show it in your income. However, you can exclude these benefits from your income to the extent of the contribution you made to a special union fund (where the contributions made were not deductible from your income).
4. You may have tax withheld
If you received unemployment compensation and are liable to ‘pay taxes’ on it, you must use Form W-4V (Voluntary Withholding Request) to have your federal income tax withheld. If you do not choose to get the taxes withheld, you will have to pay the taxes on your own.
5. Seek help from IRS.gov
If you are facing any financial difficulties and are unable to pay your taxes, you may visit IRS.gov for help. There you would find a page “The ‘What Ifs’ for Struggling Taxpayers”. It will help you understand the tax impacts and what needs to be done under some of the “what if” scenarios. The IRS would try its best to help you out of the situation.
Last Few Words
During the period when you are unemployed you may not be in a position to pay your taxes. Under such circumstances, you must contact the IRS and file your returns to avoid penalties, even if you are unable to make the payment. Alternately, you may also get in touch with one of our tax attorneys at The Law Offices of Nick Nemeth and we will be happy to help. You can reach us at (972) 734-1171.