How is Unemployment Compensation Taxed Under US Tax Law ?

unemployment compensationIn the United States , a worker receives unemployment compensation or  benefits equal to between 40-50% of their previous pay generally . This is on account of Federal Unemployment Tax Act (FUTA), which authorizes the Internal Revenue Service (IRS) to collect an annual federal employer tax. This tax funds the program to compensate  workers who have become unemployed through no fault of their own. As a rule , if anyone receieves  unemployment compensation during the year, he/she  should receive Form 1099-G that shows the amount of unemployement compenation paid to him .

Therefore , if a worker/employee becomes jobless and receives the employment compensation whether from Federal Agencies or the State Department – such receipt if fully taxable and therefore must be added to gross income of the person in the year of receipt .

The unemployment benefit  includes

  • state unemployment insurance benefits and benefits paid to you by a state or
  • the District of Columbia from the Federal Unemployment Trust Fund.
  • Railroad unemployment compensation benefits.

Is supplemental plan an unemployement compensation ?

A Supplemental Unemployment Benefit Plan (SUBP) is not an employment compensation . SUBP is a tax exempt plan to provide severance pay to workers laid off due to a reduction in force or plant closing that supplements state unemployment insurance benefits.

The supplemental unemployment benefit paid by a company managed fund to employee are  wages subject to income tax withholding and may also be subject to social security and Medicare taxes. Accordingly, W2 form shows how much of supplemental unemployment benefit you received from a company managed fund.

Does Supplemental Unemployment Benefit Suffer Withholding Tax Always?

To be excluded from wages for such purposes, the benefits must meet the following requirements.

  • Benefits are paid only to unemployed former employees who are laid off by the employer.
  • Eligibility for benefits depends on meeting prescribed conditions after termination.
  • The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state law, and the amount of regular weekly pay
  • The right to benefits doesn’t accrue until a prescribed period after termination
  • Benefits aren’t attributable to the performance of particular services.
  • No employee has any right to the benefits until qualified and eligible to receive benefits.
  • Benefits may not be paid in a lump sum

When is unemployment benefits from a private fund taxed ?

The receipt of unemployment benefit from private fund   are taxable only if the receipts are more than your total payments into the fund. However , it must be noted that since this is not regarded as wages , the taxable amount is reported as other income on Form 1040, Individual Income Tax Return.


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