Being unemployed puts every taxpayer in a stressful position. Between trying to make ends meet and searching for a new job, the last thing many people are thinking about is their tax situation. However, if you received unemployment compensation during the year, you will receive Form 1099-G and any income shown must be reported as taxable income on your return. Some are unaware that these benefits are taxable and fail to have taxes withheld throughout the year. If you do not have taxes withheld, or if you do not send in estimated tax payments, you will be facing a higher tax liability than expected at the end of the year.
The easiest way to avoid this mistake is to have taxes withheld from your unemployment compensation. This can be done by filing Form W-4V, Voluntary Withholding Request. This form allows you determine the percentage of tax you wish to have withheld from your payments. The amount withheld will show up on Form 1099-G, along with income received, and is treated in the same fashion as taxes withheld on Form W-2, as advance payments of tax for the year. If you do not have taxes withheld from your unemployment payments, you can also send in estimated tax payments to properly account for the income received.
For planning purposes, it is important to consider the tax impact of all financial transactions that occur throughout the year. Although you may be a more precarious financial situation, unemployment compensation must be treated as taxable income. If you choose not to have taxes withheld, be prepared to include these payments at the end of the year and pay Uncle Sam his portion of the income.