Life changes
Lost Your Job? How It Affects Your Tax Return
A layoff brings enough stress without a tax bill months later. Unemployment and severance are both taxable, and a few early choices decide whether you owe at filing time.
Reviewed by LaToya Clark-Thompson, FounderLast updated
What changes on your return
Unemployment compensation is taxable on your federal return. South Carolina’s Department of Employment and Workforce (or the agency in the state where you worked) reports it on Form 1099-G, which also shows any federal tax withheld. No tax is taken out unless you ask for it, so many people reach filing season with a balance they did not expect.
Severance pay is treated as wages. It usually comes on your final W-2 from the employer, with tax withheld, often at a flat supplemental rate. Payouts of unused vacation work the same way.
The upside: a lower-income year can open credits that did not apply when you were working, such as the earned income credit or a larger premium tax credit for Marketplace coverage. They are worth checking for.
Choices that matter while you are between jobs
- Ask for withholding on your unemployment. You can request federal withholding with Form W-4V, or through the state benefits portal
- Think twice before cashing out a 401(k). The withdrawal is taxable, the plan withholds part of it, and if you are under age 59½ an early-withdrawal tax often applies. Some exceptions exist, including one tied to the age you separate from the employer, but they are narrow
- If you buy Marketplace health coverage, report income changes to the Marketplace as they happen, so the advance credit stays close to what you actually qualify for
- Keep records of your job search. Job-search costs are not deductible for most employees under current federal law, but the records help if you start freelancing
Forms that will show up
- Form 1099-G for unemployment benefits (and for any state refund you received)
- Form W-2 from the employer that let you go, including severance
- Form 1099-R if you took money out of a retirement plan
- Form 1095-A if you had Marketplace coverage, which is needed to complete Form 8962
- A new W-2 or 1099 if you started work again before the year ended
If a 1099-G shows benefits you never received, that may be identity theft involving unemployment claims. Report it to the state agency and do not simply leave the form off; we can help you handle it on the return.
Common mistakes
The biggest one is assuming unemployment is not taxable because nothing was withheld. Next is cashing out a retirement plan for cash flow without seeing the full tax cost first. Third is ignoring the Marketplace: if your income came back up later in the year and the advance credit was never adjusted, part of it may have to be repaid. If you have already filed and realize something is missing, an amended return fixes it.
Getting help, and the next step
A job-loss year often has more moving parts than a normal one: two kinds of income, a retirement withdrawal, coverage changes, and sometimes new freelance work. That is a good year to have the return prepared. Bring the forms above to a tax preparation appointment, or start with our tax prep checklist. If you are picking up contract work while you look, read going from W-2 to 1099 before the first invoice. And if you owe and cannot pay it all at once, our payment plan guide explains the options.
Frequently asked questions
Is unemployment taxable in South Carolina?
Unemployment benefits are taxable on your federal return, and because South Carolina starts from federal adjusted gross income, they generally flow into your state return as well. The amount appears on Form 1099-G. Since withholding is optional and off by default, check whether you asked for it; if not, plan for tax on those benefits when you file.
How do I get taxes taken out of my unemployment checks?
You can request federal income tax withholding by giving Form W-4V to the agency paying your benefits, or by choosing withholding in the state benefits portal if it offers that option. Withholding is set at a flat rate the IRS allows for unemployment. If you did not set it up, you can make estimated payments instead to reduce what you owe at filing.
Is severance pay taxed differently from regular pay?
Severance is taxed as wages for income tax purposes and is subject to Social Security and Medicare tax, just like a paycheck. Employers often withhold on it at a flat supplemental rate, which can be lower than your actual bracket. It is reported on your W-2, usually the final one from that employer, and it all goes on the same return.
Should I cash out my 401(k) after losing my job?
It is a last resort for most people. The amount you take is taxable income, the plan withholds part of it up front, and an additional early-withdrawal tax may apply if you are under age 59½ and no exception fits. Leaving it in the plan or rolling it into an IRA keeps it tax-deferred. If you must withdraw, see the tax cost before you sign.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
Related pages
You changed jobs
Two W-2s, an old 401(k), a bonus and withholding that may not fit anymore.
Learn moreYou went from W-2 to 1099
Employee to contractor: no withholding, self-employment tax, estimates and new deductions.
Learn moreYou owe taxes this year
Why you owe, why filing on time matters more than paying in full, and the payment options the IRS offers.
Learn moreYour refund is smaller than last year
Withholding, aged-out credits, side income and status changes: the usual reasons a refund drops, and how to tell which one is yours.
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