Unemployment insurance is benefit compensation program available to workers who have involuntarily become work-separated. The program is funded jointly by federal and state contributions. In most states, funds are provided solely by employer contributions, however in several states, legislation requires that employees also make small contributions to the fund. If you want to apply for unemployment benefits, you must contact your state unemployment office to file a claim.
Unemployment insurance benefits are taxable. This means you must claim the amount of unemployment you receive on your federal income tax return. The IRS treats your compensation as normal income and taxes the amount you receive at the rate that applies to your filing status for the year.
You can elect to have federal and state income tax withheld from your unemployment payments. You make the election when you file your initial claim for benefits. State withholding percentages may vary, but the federal withholding is set at 10 percent. You can elect to have taxes withheld for one or both agencies. Since your unemployment compensation is taxable income, it is a good idea to elect the income tax withholding; otherwise you may owe additional taxes when you file your income tax return.
The state you receive unemployment insurance benefits from will send you a federal 1099-G for the year you received compensation from the fund. Form 1099-G is also supplied to the IRS and details the amount of unemployment compensation you receive in box 1. The state that paid your unemployment benefits must supply Form 1099-G to you by January 31. If you elect to have state or federal income tax withheld from your payments, Form 1099-G will show the amount of income tax that was deducted from your benefits.