What to Know About Unemployment Benefits
Unemployment benefits can be a financial lifeline when you find yourself out of work, helping you to make ends meet and until you find work again. But many people are unfamiliar with how, exactly, unemployment benefits work and the various financial implications of collecting them. Here are some ways collecting unemployment benefits could financially impact various areas of your life, including taxes, student loan payments, and your credit score.
How do unemployment benefits work?
The rules for claiming unemployment benefits and the amount you can receive vary by state. Typically, employees need to have lost their job through no fault of their own,1 have a minimum level of earnings from recent employment, and be actively seeking work.
In most states, unemployment insurance provides up to 26 weeks of benefits2 and replaces about half of their previous wages.
Are unemployment benefits taxable?
Unemployment benefits are designed to stand in for your regular wages. As such, the IRS considers them to be taxable income3 subject to federal income taxes, but not Social Security or Medicare4 taxes. At the end of the tax year, the state will send you Form 1099-G5 showing the total amount of benefits you received. You'll need that form to prepare your federal tax return.
Whether you will actually owe taxes on that income depends on your overall tax situation (total annual income, filing status, deductions, etc.). You may choose to have federal income tax withheld from your weekly payments to lessen the chances of getting a big tax bill at year-end. File Form W-4V6 with your state unemployment office to instruct them to withhold tax.
As for whether your state taxes unemployment benefits, it depends on where you live.7 Some states, including Georgia and South Carolina, fully tax unemployment benefits. Some states tax part of your benefits. Other states, including Alabama, Florida, and Tennessee, don't tax them at all.
How do unemployment benefits affect child support payments?
If you are responsible for paying child support, your child support order remains in effect even if you are unemployed. When you file for unemployment, you may have to let the unemployment office know about your child support order, so it can deduct payments from your benefits.
You may be able to qualify for a modification8 in your child support obligation based on your change in income. Talk to your attorney to discuss your options.
How does unemployment impact student loan payments?
Losing your job can make it difficult to pay student loans, but don't simply stop making payments. That will negatively impact your credit score, creating financial problems for you in the long run.
If you anticipate having trouble making student loan payments, talk to your servicer. Depending on the type of loan you have, you may be able to enroll in an income-driven repayment plan (IDR). The U.S Department of Education has a calculator9 that provides payment estimates for different IDRs based on your specific loans.
If an IDR isn't an option, your servicer may be able to delay payments through forbearance or deferment.10 Both forbearance and deferment allow you to temporarily postpone student loan payments while you are unemployed. However, interest continues to accrue on your loan during forbearance. Interest doesn't accrue during deferment, but it's typically only available to people with subsidized federal student loans or Perkins loans.11
Does being unemployed hurt your credit score?
If you're concerned that losing your job will damage your credit, the good news is employment status isn't a factor in your credit rating.12 So being unemployed won't directly impact your credit score, but losing your income could make it difficult to pay your bills on time. If job loss leads to using your credit cards more than usual or missing payments, this can also negatively impact your credit score.
If you need to apply for benefits or want to know more about benefits available in your state, contact your state's unemployment insurance office.13
Important disclosure information
“This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.”
- U.S. Department of Labor, How Do I File for Unemployment Insurance?" accessed May 6, 2020. Back
- Center on Budget and Policy Priorities, Introduction to Unemployment Insurance," updated July 30, 2014, accessed May 6, 2020 Back
- IRS.gov, Unemployment Compensation," updated December 20, 2019, accessed May 6, 2020. Back
- TaxAct, "How Unemployment Affects Your Taxes," accessed May 11, 2020. Back
- IRS.gov, Form 1099-G," accessed May 6, 2020. Back
- IRS.gov, Form W-4V," accessed May 6, 2020. Back
- Kiplinger, "Is Unemployment Taxable? State-by-State Guide to Unemployment Benefits," Published April 4, 2020, accessed May 11, 2020. Back
- LegalZoom, Can Child Support Payments Be Garnished From an Unemployment Check?" accessed May 6, 2020. Back
- U.S. Department of Education, Try Loan Simulator," accessed May 6, 2020. Back
- U.S. Department of Education, Get Temporary Relief," accessed May 6, 2020. Back
- NerdWallet, "Deferment vs. Forbearance: Which is Right for Your Student Loans?" Published March 27, 2020, accessed May 11, 2020. Back
- Experian, Is Employment Listed in Your Credit Report?" accessed May 6, 2020. Back
- U.S. Department of Labor, Services By Location," accessed May 6, 2020. Back
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