This article is the third in a continuing series on significant life events that have an impact on your federal income tax return filed with the Internal Revenue Service (IRS). This article article is focused on some of the considerations when you have a job change. Further reading about the areas covered in this blog is available on the IRS’s web site.
When you lose your job, it can result in several events or types of new income to you that have tax implications. Some of these events and income include the following.
Severance Pay. It is not unusual when you lose your job to receive some form of severance pay based on your time worked, salary, or other factors. Severance pay is fully taxable and must be reported appropriately on your federal income tax return. Your employer should withhold appropriate taxes from your final severance pay check and reflect this withholding on the W-2 they provide to you at the end of the year.
Vacation and Sick Days. As with severance pay, when you lose your job, your employer may pay you for unused vacation or sick days. Also as with severance pay, pay for vacation and sick days is fully taxable. Your employer should likewise withhold taxes for vacation and sick days and will reflect this withholding on your W-2.
Unemployment Compensation. When you are out of work, you can file for unemployment insurance benefits. Unemployment pay is usually paid every two weeks, but this can vary depending on the state where you live. Unemployment pay is taxable.
Gifts. Friends or family may be willing to give you money while you are out of work to help you make ends meet. Usually, if you receive a gift, you are not responsible for paying any federal income tax on the gift received. However, the person giving you the gift may be subject to paying tax if the gift receives a certain amount.
Retirement Account Withdrawals. If you have money in a retirement account such as a 401k or IRA, you may be able to withdraw money to use it to pay your bills while out of work. However, money that was not taxed when it was placed into a retirement account will be taxed when you withdraw it before you reach retirement age.
Remember the list above is not an exhaustive list of the types of income or events that can result from job loss but rather are just some of the more common examples of income you may receive related to job loss. If there are other changes to your income related to a loss of employment, you should speak with a tax attorney to be sure you account for them accurately on your federal income tax return.
Receiving a New Job
When you obtain a new job, this event can likewise result in new income or types of income that can have tax consequences.
Location. If you receive a new job in a new state, the job change could affect whether you have to pay state income tax. State income tax is determined on a state by state basis, so you should understand the impact state income tax will have on your situation.
Signing Bonus. If you receive a bonus of some form when you start a new job, the bonus will be taxable. Bonuses are generally taxed at a higher rate than normal salary or hourly wages, and your employer should reflect this withholding on your W-2.
Tips and Other Additional Pay. If you receive a job in a different industry or with a different pay structure (e.g., salary instead of hourly), it may affect the type of income on which you need to pay taxes, how much tax you have to pay, and who is responsible for making sure the tax is paid. In general, your employer will withhold and pay federal income taxes on your behalf, but for certain income types such as tips you may be responsible for keeping track of the money you receive and paying tax on it at the end of the year.
Again, the examples above are general in nature and do not account for all situations related to a job change. If you have additional questions about tax events related to your job change, or you need help filing your federal income tax return, you should speak with a tax attorney who is familiar with the tax laws in your state.
- Federal income tax significant events, Part 1 – Birth (taxlawhome.com)
- Federal income tax significant events, Part 2 – Marriage, divorce (taxlawhome.com)
- Tax return: Do I need to file taxes for 2011? (taxlawhome.com)
- Federal income tax return penalties and what to do next (taxlawhome.com)
- Federal income tax have the IRS on your back? (taxlawhome.com)
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.