The concept of unemployment benefits is that those who are working pay into a fund that is available for those who are unemployed. It is a safety net. It is intended to provide a minimum living standard during temporary periods of unemployment.
One might think that unemployment benefits are not taxable. After all, the Federal government makes grants and payments to the states, including Texas, and to do so and then require unemployment recipients to pay income tax back to the IRS would seem unnecessary. One could make the case that these benefits should be tax-free. That is not what the law says, however.
Unemployment benefits, including Texas unemployment benefits, are generally taxable.
Federal Tax on Texas Unemployment Benefits
Since the State of Texas does not have a state income tax, you only have to report unemployment benefits to the IRS.
Texas will issue you a Form 1099-G showing how much you received in unemployment benefits. The Form 1099-G reports:
- Unemployment benefits (both regular and federal extended benefits)
- Federal income tax withheld from unemployment benefits, if any
- Alternative Trade Adjustment Assistance (ATAA) and Reemployment Trade Adjustment Assistance (TAA) payments
It will also provide this information to the IRS. So you just have to provide the Form 1099-G to your tax return preparer or remember to include it on your tax return if you prepare your own tax return.
If you did not receive your Form 1099-G but were paid unemployment benefits, you should call the TWC (or login to the TWC website) to get the information.
What about Payroll Taxes?
While unemployment benefits are subject to Federal income tax, they are not subject to payroll taxes. More specifically, Texas unemployment is not subject to Social Security or Medicare taxes on unemployment benefits. These taxes are commonly referred to as “FICA taxes.”
The employee pays just over 8 percent in FICA taxes. Thus, those unemployed have an 8 percent advantage over those who are employed.
The Form 1099-G is Incorrect
The Form 1099-G reports all amounts paid to you by Texas. It even includes amounts that you repaid (due to an overage owed to Texas).
If you repaid any amount of Texas unemployment benefits, you get to deduct this amount on your Federal tax return. It is up to you to remember to do this as your Form 1099-G will not be adjusted to reflect the lower amount.
If the Form 1099-G is incorrect for some other reason, you should contact the Texas Workforce Commission about the discrepancy.
What if I Can’t Pay My Taxes
The IRS has a number of rules and programs for those who cannot pay their taxes. In most cases, the IRS will put your tax account on “non-collectible” status if you are unemployed. This is just an unofficial status with the IRS whereby the IRS will check back on you in a year or two.
If you still have some assets, the IRS may insist on a payment plan. In other cases, you may be able to settle your balance for less. You should consult with a local tax attorney about these options.