Unemployment Compensation and Taxes
All unemployment compensation is taxable; therefore, the first thing you’ll need to consider is whether to have federal and state taxes withheld from this income. If you
choose to have federal taxes withheld from your unemployment benefits, your only withholding option is 10% of each payment. There is more flexibility when it comes to state
taxes; you are allowed to choose the percentage you want withheld for North Carolina taxes as long as the percentage chosen is a whole number.
If you do not have income tax withheld, you may have to pay estimated tax. Additionally, if you do not pay enough tax, either through withholding or estimated tax, or
a combination of both, you may have to pay a penalty. Therefore, it is a good idea to have both federal and state taxes withheld from your benefits. Of course, this will
mean that you will receive less income upfront, but you will avoid an unnecessarily large amount due when you file your income taxes.
If you would prefer to analyze your specific situation to determine if you should have taxes withheld, IRS Publication 919, "How Do I Adjust My Tax Withholding",
may be of some assistance. Though this publication mainly helps determine if adjustments to payroll withholdings are needed, you may find the following worksheets from
the publication useful when deciding whether or not to have taxes withheld from your unemployment compensation:
- Worksheet 1 – Projected Tax for 2011.
- Worksheets 2 through 6 – These sheets may be needed in order to have the information for Worksheet 1. As you go
through Worksheet 1, the instructions will direct you to these sheets if they are needed.
- Worksheet 7 – Projected Withholding for 2011. The bottom line of this sheet compares this year’s projected
tax withholdings to the projected tax from Worksheet 1. Therefore, upon completion you will have an idea of how
the numbers may be affected if you choose not to have taxes withheld from unemployment.
Publication 919 can be found at www.irs.gov
by typing 919 in the search engine at the upper
right hand side of the screen. Select the PDF Version and Worksheets 1-7 are located on pages 11-16.