Wait a second! You are telling me I have to pay taxes on my benefits? Afraid so. In the eyes of the IRS all benefits are considered taxable income. However, taxation on benefits is not the same as taxation on normal income, that is, income from a job. If you are unemployed or know someone that is, it is worth spending a few minutes checking how the taxation side of things works. It can save you a lot of trouble in the long run.

So What Taxes Do I Have To Pay?

You have to pay federal income tax on all the benefits you receive, whether they are state unemployment compensation benefits or federal EUC or EB benefits. They are all taxable. However, in Pennsylvania you don’t have to pay state or local taxes on your benefits. This means you will have to pay taxes equivalent to your federal tax bracket after deductions, but don’t have to worry about Pennsylvania taxes.

How Can I Pay For These Taxes?

You have four main options.

1) You can collect all your benefits and set aside money for when your taxes are due. If you choose this option, put aside at least 10 percent of your benefit amount. So if you receive $200 a week, put aside $20 a week, $80 a month aside for taxes.

2) Ask the PA Department of Labor to deduct an estimate of your taxes from your benefits. This is probably the easiest and safest method. You just have to sign a form authorizing the PA Department of Labor to deduct 10 percent from your gross benefits. Gross benefits means the entire sum you are entitled to before any deductions, such as deductions for earnings or child support, are taken away. If you wish the PA Department of Labor to withhold your federal taxes click here and update your tax withholding status or call 1.888.255.4728.

3) Put aside 10 percent of your gross benefits and make your own estimated tax payments every quarter. This is what self-employed workers do to keep on top of their taxes and you can do it whether you are self-employed, unemployed or employed. Simply fill in a 1040ES form to work out your quarterly tax. If you need any help working out your estimated taxes or want to know how to make these payments call 1.800.829.1040.

4) If your file joint returns with your spouse, get your spouse to increase the taxes they withhold from their wages. Once it is time to work out how much you owe, the amount your wife or husband overpaid will offset the taxes you owe. For this system to work you need to estimate how much you will owe in taxes and how much of your spouse’s income needs to be withheld to cover your tax burden.

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