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
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
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
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
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.
“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.
Center on Budget and Policy Priorities, Introduction to Unemployment Insurance,"
updated July 30, 2014, accessed May 6, 2020
IRS.gov, Unemployment Compensation," updated December 20, 2019, accessed
May 6, 2020.
TaxAct, "How Unemployment Affects Your Taxes," accessed May 11, 2020.
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