For those who were working most of this year and just started taking
unemployment compensation, having taxes taken out might not be
The reason is that while working you were making far more than your
unemployment check. If you have been properly withheld for the first
six months or so then you were being overwithheld in retrospect.
Here is an example using 2008 rates:
Say you made $20/hour or $40k/year and you got canned in July.
You were withheld for a $40k earner - possibly getting $2,000 taken
out of $20k of earnings at the time of ending employment.
Then, you got unemployment for five months at about $1,500/month.
Your total earnings ended up being $27,500 ( give or take ).
The total tax for a single person who made $40,000 would be taken
from, lets say $30,000 taxable income ( assume $10k in deductions ).
You would owe about $3,700 in taxes and would normally be getting
a refund of about $300.
Now, assuming you made that $27,500 your tax would only be $1,800
on $17,500 in taxable income. Even with no withholding on your
unemployment check, you still get a refund.
You need to run the numbers to see if withholding is really necessary.
If you assume that you'll find another job with equal pay by June, 2010
then even if you take unemployment insurance with no withholding for
the first six months of 2010 the effect is the same. You don't need to
take withholding out.
If you have ANY bills with interest attached from credit cards, you are
much better off keeping current with the extra money than having tax
If you end up with a job late into the next year, you can have additional
withholdings taken out so that you are not in an IRS penalty situation
when April of 2011 comes up and you have to pay your 2010 taxes.