Yes, it seems cruel and unusual, but any unemployment compensation you receive from the United States government (both federal and state) is also taxable by the United States government. You even have to pay taxes on unemployment benefits paid through a federal disaster relief program [source: Internal Revenue Service]. If that's news to you, you're not alone. According to a recent survey, nearly 40 percent of taxpayers had no idea that unemployment benefits were taxable [source: Block].
If you receive unemployment benefits, the government will send you Form 1099-G a few months before taxes are due. The form will show exactly how much money you earned in unemployment benefits. Your duty is to list that amount on the appropriate line of your 1040 income tax form [source: Internal Revenue Service].
To avoid the sticker shock of paying all of your unemployment compensation taxes in April, you can choose to have taxes withheld from your unemployment checks throughout the year. Simply complete Form W-4V, Voluntary Withholding Request, and submit it to the office that sends you your benefits. From then on, the government will withhold 10 percent from each check [source: Internal Revenue Service].
Note that unemployment benefits paid through an employer's private supplementary unemployment fund or a union-based unemployment fund are taxed separately from government unemployment compensation.