Income Taxes

• As a citizen of the United States and a citizen of your state, you owe those governments a percentage of your income as a tax. Unemployment benefits count as income, and you have to pay taxes on them. Each year, the state labor office that distributes your payments sends a 1099-G form to both the federal and state governments to report the amount you collected in benefits.
  
  

Withholding Payments

• Withholding payments is a way to avoid paying your entire tax bill in one lump sum in April. Instead, you send a percentage of each payment to the government throughout the year. At the end of the year, if you owe more money, you must pay additional tax. If you owe less money than you sent, you will receive a refund. Most states allow you to participate in the withholding program with your unemployment checks.
  
  

Changing Your Withholding Status

• By default, most state labor offices won't withhold taxes from your unemployment payments. However, it may be in your interest to participate in the program, especially if you owe a large tax payment. You can fill out the W-4 tax form, sign it and return it to the state labor office. The W-4 form is available from your state labor office's website. The withholding may not begin as soon as the W-4 form is submitted, but withholding should start after two or three more payments.
  
  

Manually Withholding

• Some states only offer federal withholding from unemployment payments. If you want to withhold payments for your state taxes, you have to put the money aside yourself. You can either place the money into a savings account until you have to pay your taxes the following April, or you can send the money to your state's division of revenue as a payment. If you do your own withholding for your taxes from your unemployment payments, your 1099-G form received at the end of the year won't reflect it. You have to keep track of the payments yourself.