Unemployment Tax

The federal government, as well as all state governments, impose an unemployment tax on employers.  The unemployment tax levied by the federal government is based upon the Federal Unemployment Tax Act. The purpose of the Act is to help generate revenue that will not only pay for federal unemployment benefits extension payments but also for the individual state department of labor agencies that administer and assist with state unemployment benefits throughout the United States. In addition to the tax levied against employers to help pay for unemployment benefits individuals who receive unemployment insurance compensation must also report their weekly benefit checks as earned income to the Internal Revenue Service. This article will focus on both the Federal Unemployment Tax Act as well as the requirements of individuals receiving unemployment benefits purport the benefits as income.

The Federal Unemployment Tax Act

At the time this article was written the Federal Unemployment Tax Act imposed a tax that equaled 6.2%. This rate was imposed upon the first $7000 of gross wages earned by each employee every year. After paying this tax on the first $7000 of wages the additional income earned by the employee was not subject to an unemployment tax.  In addition to the tax rate imposed by the Act certain credits are available to employers when they meet various requirements that are beyond the scope of this article.

Not all income earned by employees is subject to the Federal Unemployment Tax Act. Exempt income includes money earned by employees outside the United States, any income paid to the estate of a deceased employee, income paid by a parent to a child if the child is age 20 or younger, any income paid to an individual by a foreign government or certain defined international organizations, wages paid by nonprofit organization and income paid by a hospital to someone working there for an internship.

Is Unemployment Taxable?

Beyond the unemployment tax levied against employers in certain situations, individuals who file UI claims and receive UI compensation are responsible for reporting the compensation earned on their annual income tax report. This may come as a surprise to many individuals who have or currently receive unemployment benefits, as they probably always assumed that the answer to the question “Is Unemployment Taxable?” was no. Prior legislation through the American Recovery and Reinvestment Act of 2009 (also mistakenly known sometimes as the American Reinvestment and Recovery Act) temporarily excluded the first $2400 of unemployment benefits income from having to be reported to the Internal Revenue Service. However that legislation has expired and current law requires that all unemployment income be reported on your 1040 report.

For anyone concerned about paying unemployment tax on unemployment benefits received, you may fill out Form W-4V and submitted to your individual state workforce office. Once the officers received this Form they will automatically withhold 10% of the unemployment benefits you are currently being paid to help ensure that you pay all applicable income tax obligations you owe.  Keep in mind that once you submit Form W-4V and a portion of your benefits is withheld that money cannot be returned back to. However, should you change your mind and want to withhold money yourself you can always file the necessary paperwork to undo the 10% withholding by the state.