Is Unemployment Taxable Income?

Recent events have more Americans receiving unemployment compensation benefits. Americans receiving unemployment compensation benefits should take steps now to avoid a nasty surprise on their tax bills next year.

Is money received as unemployment compensation considered income?

Yes. Money received as an unemployment compensation benefit is considered to be “income.” Therefore, unemployment compensation tax is usually subject to the same tax requirements as all other income, except it is not subject to payroll taxes, which include the taxes for Social Security and Medicare that are usually withheld from paychecks. However, the benefits received must be included in your income and will be taxed at your ordinary income tax rate.

All benefits are considered gross income for federal income tax purposes, including benefits paid under the federal Emergency Unemployment Compensation (EUC), state Extended Benefits (EB), Trade Adjustment Assistance (TAA), and Disaster Unemployment Assistance (DUA) programs. These benefits are reported to the Internal Revenue Service (IRS) for the calendar year in which the benefits were paid.

Is unemployment compensation taxed by the Commonwealth of Pennsylvania and local governments?

No. Unemployment compensation benefits are not taxable by the Commonwealth of Pennsylvania and local governments.

Are there things I should consider with Unemployment Compensation Tax?

Unemployment compensation benefits are not taxable by the Commonwealth of Pennsylvania and local governments.

You may choose to have federal income tax withheld from your UC benefit payments at the rate of 10 percent of your weekly benefit rate plus the allowance for dependents (if any).
Please note: The 10 percent deduction is based on your gross weekly benefit rate (i.e., the amount of benefits payable before deductions for earnings, benefit reduction, child support and so forth). To request the withholding, you will need to fill out form W-4V ( the “V” stands for voluntary). The request can be made online.

Usually unemployment benefits are only about $200 a week, so it might feel easy to rationalize taking the money now and when you get back to work increasing your deductions. But with these very generous unemployment benefits, that mindset could be a substantial liability.

If you are unemployed at the moment and worried about how this will impact your taxes, the earned income tax credit (EITC) may be something worth exploring. The EITC provides between $538 and $6,600 in tax credits, depending on your income and the number of dependents you have. If you qualify, the tax credit can be used to offset what you owe on your total tax bill.
The 2020 income limit for the EITC is $15,820 for those without children who are single and $21,710 for married households filing jointly. In the past, you may have made too much to qualify, but those who are on unemployment for several months may qualify since the IRS does not consider unemployment checks as earned income.

Do you have a question that is not addressed above? Contact Wayne Pecht or a business law attorney to schedule a consultation at 717-761-4540.

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