If you were laid off from your job at some point in the last year, at least take comfort that you are not alone.
In 2022 alone, there were approximately 15.4 million layoffs in the United States, as per one recent study. About 6.9 million of them happened in the last half of the year, from August to December. It's also worth noting that this is certainly nothing new. It has been estimated that about 40% of people have been laid off (or fired) from a job at least once in their lifetime, and about half the country experiences full-blown layoff anxiety regularly.
Whether you are laid off or fired, the chances are high that you will quickly find unemployment. While this can provide some much-needed financial relief at an important part of your life, there are some things about potential tax implications that you'll want to be aware of moving forward.
Losing Your Job and Taxes: Breaking Things Down
Whenever people find unemployment, one of the first things they often ask themselves is whether that money is taxable. To put it simply, it likely is.
When you fill out your income taxes the following year, the IRS will require you to report any unemployment income you received. You will do this with Form 1099-G. The vast majority of all states do tax this type of unemployment income, so it's likely that you'll have to pay something on it. The only exception is those states that don't have any income taxes or those with laws on the book that separate unemployment benefits from regular income regarding tax purposes.
When it comes to actually paying any money owed from your unemployment benefits, one of the easiest ways to do it involves a choice that you'll make when you sign up in the first place. At that time, you can request that the government take 10% of each check to pay your taxes. If you don't want to do that, you can also make estimated payments quarterly - similar to what you would do if you were self-employed.
Note that if you choose to go that second route, you will make estimated payments four times - on April 15, on June 15, on September 15, and January 15. Note that if the 15th falls on a Saturday, Sunday, or Holiday. The due date moves to the next business day.
Additional Considerations About Unemployment Benefits and Income Taxes
Another critical thing to remember regarding unemployment benefits and your taxes is that signing up at all could impact your ability to get certain other tax credits you might be depending on. The primary example is the Earned Income Tax Credit or the EITC.
Many people need to realize that unemployment benefits are not considered earned income. Because of this, depending on how much money you received in unemployment, it could reduce your EITC amount - or prevent you from getting it.
For example, the EITC is worth a maximum of $6,935. Your credit amount may be reduced if you don't get it. The same applies to the Child Tax Credit or CTC, worth $2,000 per child for your 2022 taxes.
Finally, it's essential to understand that if you're on unemployment due to the sudden loss of a job, it's entirely possible that you took advantage of other government benefits throughout the year as well. For example, you may need housing or childcare subsidies, or you're on SNAP benefits. If you're worried that they're taxable like unemployment benefits, don't be - this typically is not the case.
Filing your income taxes can be complicated in the best of years. Still, it is especially so once you start to enter things like unemployment benefits into the equation. This is why it's always important to consult the help of trained financial professionals. They can eliminate all the guessing and confusion from the equation, allowing you access to every last dollar you're entitled to with as few potential issues as possible.
If you'd like to find out more about unemployment benefits and the potential tax implications they bring with them, or if you have any additional questions you'd like to discuss with someone in a bit more detail, please don't hesitate to contact us today.