Filing Taxes When Unemployed 

Tax season can mean stress for income earners. The paperwork, the filing, and oftentimes the tax payments- can be a huge headache. But what if you’re unemployed? Even if you don’t currently hold a job, you may still be required to report on your income and employment status that year. 

As a taxpayer in the United States, it’s your responsibility to determine whether or not you’ll need to file taxes, but in typical IRS fashion, doing so is not always straightforward. If you’re wondering if you need to file taxes while unemployed, we’re here to help. We’ll walk you through determining whether you need to file taxes while you’re unemployed, and how to do so. 

Do You Need To File Taxes While Unemployed?

Whether you’ve just lost your job and are receiving unemployment, your spouse is the working member of your household, or you’ve finally retired, it’s still your obligation to determine whether you need to file your taxes. The IRS offers guidelines to help determine whether you need to file, based on your age, filing status, and income for the past year. If you surpass the minimum income to file taxes for your age range and filing status, you will need to file taxes for the year. 

Let’s review some common scenarios in which you’ll still need to file taxes, even if you are unemployed:

Scenario #1: You’re unemployed but made a little money through self employment

Did you earn more than $400 through self employment this past year? If so, you’ll definitely need to file, no matter your filing status or age. This may include any activity you partake in for which profit is your main motive. That could mean selling baked goods to friends and family, performing a technical service for money, or even receiving a small stipend for a bit of consulting. 

Filing taxes for unemployment income requires a little more work than filing with a more traditional W-2. If you received more than $600 payment from a single company, that company is required to send you a 1099. You’ll use this to file your taxes, reporting on your “Nonemployee Compensation” in Box 7. But if you haven’t received that much from a single company, or you completed work for a friend, things are a bit trickier. You must report on all of your income, whether or not you received a 1099. 

That means it’s your responsibility to calculate your gross income and report on that amount while filing your taxes, whether or not you’ve received a form that states your earnings. 

Scenario #2: You’re receiving income from unemployment payments 

Let’s say you lost your job over a year ago and have been receiving unemployment compensation while hunting for a new job. Even though you haven’t earned income from an employer throughout the last tax year, you’ve still earned income. All persons receiving unemployment compensation should receive Form 1099-G from the IRS. This form will report the exact amount you’ve been paid through unemployment compensation, which you’ll use to file your taxes. 

Note that, if you receive unemployment benefits, you may also need to make estimated tax payments each quarter. This can be an inconvenience or burden for some taxpayers, so the IRS offers a form known as the Voluntary Withholding Request to help. This form requests that the IRS withhold 10% of your unemployment compensation to go towards federal income tax in lieu of making quarterly estimated tax payments. 

Note that, if you received severance pay when you lost your job, this amount should not be reported as unemployment compensation. Instead, this money is considered taxable wages and should be reported using a traditional W-2. 

If you receive unemployment income and have a child who depends on you financially, you may qualify for the Earned Income Tax Credit, or EITC, which is one of the IRS’ tax breaks for unemployed people with children. First, you’ll need to determine if your child qualifies as a qualifying child. They must be your child (natural, adopted, step, foster, or grandchild) or your younger sibling, live with you more than half of the year, and be under certain age limits. 

You’ll receive an increasing tax break with each qualifying child, maxing out at $6,557 for three or more qualifying children. In order to receive the EITC, you must file a tax return, even if you don’t meet standard income minimums requiring you to file taxes. 

Scenario #3: You’re unemployed, but your spouse earns a salary 

If this describes you, you’ve got a few different options. You and your spouse can each file separately, in which case your spouse will file as usual and you’ll file if you either made more than $12.2k from an employer, or $400 from self-employment. 

Another option is to file jointly, meaning filing as a household. If your spouse falls within certain tax brackets, this can be a more financially sound option. In this case, your spouse’s income is considered your household income. That may leave your spouse’s income amount taxed at a lower rate. 

For instance, if your spouse made $70,000 this past year and you each file separately, that income will be taxed at a rate of 22%. However, if she made the same amount and you both file jointly, the income will only be taxed at a rate of 12%. 

What if I’m unemployed and unable to afford my tax payment?

Depending on your particular financial situation, tax payments can run you a pretty penny. For those who become unexpectedly unemployed or have recently fallen on hard times, an impending tax payment can be not only stressful, but oftentimes unmanageable. Unpaid taxes can lead to tax penalties, tax liens, and even wage garnishment. Fortunately, the IRS is not the cold-hearted enemy that pop culture often makes them out to be. There’s hope for situations like these. 

The IRS has established a program to help taxpayers slow the payment of their tax debt, or reduce the amount of taxes owed altogether, as long as the taxpayer can prove that the payment would cause financial hardship. This is known as the IRS Hardship Program. If a person qualifies for the IRS Hardship Program, they are declared “Uncollectible” and their property and assets cannot be touched by the IRS. 

To qualify for the program, you’ll typically need to meet the following requirements: 

• Your annual income is less than $84,000
• The majority of your money goes to basic living expenses, including: 
  • Food, clothing, housekeeping supplies, and personal care products 
  • Housing and utilities
  • Health care expenses
  • Transportation

Tally your basic living expenses above and subtract them from your annual income. The number you’re left with will be your net disposable income. If that number is negligible, you’ll likely qualify. 

To apply, you’ll need IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. This form provides the IRS with information about your financial situation, including income, assets, expenses, and more. These may include things such as: 

• Income
  • Self-Employment Income 
  • Unemployment Income 
• Assets
  • Bank accounts 
  • Investments 
  • Physical property, such as your home, vehicle, and more 
• Expenses
  • Food and clothing 
  • Housing and utilities 
  • Out-of-pocket healthcare
  • Transportation
  • Childcare 

If you do qualify for the IRS Hardship Program, a number of options for repaying your taxes without extreme financial hardship will become available to you. This may include: 

• An Installment Agreement, through which you’ll repay your outstanding taxes over the course of 72 months. If you do agree upon this option, you’ll accrue interest for each month that your payment is late, so it’s best to pay off sooner if you can. 
• An Offer in Compromise, through which you and the IRS will come to an agreement on a lower payment amount than your unpaid tax amount, reducing the overall financial hardship. 

Once you qualify for the IRS Hardship program, you may remain in that program for up to ten years. Every 2 years, a member of the IRS will re-assess whether you still qualify for the IRS Hardship program. As long as you continue to qualify, you’ll remain in the program with access to your agreed-upon solution. 

If you are unemployed and having trouble determining whether you need to pay taxes, or you’re struggling with how to pay your taxes with no active income, you’re not alone. At Community Tax, our tax experts are here to help you navigate the often tricky IRS. We’ll help you to understand exactly what options are available to you, and walk you through the pros and cons of each, so that you can rest assured knowing that your solution is the best available. Contact us today at (844) 325-4360. Our experts are standing by to help.