Publication 4128
 

Tax Impact
 

of Job Loss
 

The Life Cycle Series
 

A series of informational publications designed to educate 

taxpayers about the tax impact of significant life events. 

Publication 4128 (Rev. 5-2020) Catalog Number 35359Q Department of the Treasury Internal Revenue Service www.irs.gov 
Publication 4128

Facts
 

References 

• Publication 17, Your 

Federal Income Tax (For 

Individuals) 

• Publication 575, 

Pension and Annuity 

Income 

• Publication 334, 

Tax Guide for Small 

Businesses 

JOB LOSS CREATES TAX ISSUES 

The Internal Revenue Service (IRS) recognizes that the loss of a job may 

create new tax issues. The IRS provides the following information to 

assist displaced workers. 

•	 Severance pay and unemployment compensation are taxable. 

Payments for any accumulated vacation or sick time are also 

taxable. You should ensure that enough taxes are withheld from 

these payments or make estimated payments. See IRS Publication 

17, Your Federal Income Tax, for more information. 

•	 Generally, withdrawals from your pension plan are taxable unless 

they are transferred to a qualified plan (such as an IRA). If you are 

under age 59 1⁄2, an additional tax may apply to the taxable portion 

of your pension. See IRS Publication 575, Pension and Annuity 

Income, for more information. 

•	 Job hunting and moving expenses are no longer deductible. 

•	 Some displaced workers may decide to start their own business. 

The IRS provides information and classes for new business owners. 

See IRS Publication 334, Tax Guide for Small Businesses, for 

more information. If you are unable to attend small business tax 

workshops, meetings or seminars near you, consider taking 

Small Business Taxes: The Virtual Workshop online as an 

alternative option. 

Important Note about Health Insurance Coverage. If you, your 

spouse, or your dependent enrolled in health insurance coverage 

through the Health Insurance Marketplace and you have a change 

in circumstances such as a change in income, let the Marketplace 

know about it. Certain changes in circumstances - like loss of a job 

or employer provided health insurance coverage - may also open the 

door for a Marketplace special enrollment period allowing you to make 

changes in your health care plan when it’s not open season. Reporting 

changes will help you get the proper type and amount of financial 

assistance so you can avoid getting too much or too little assistance in 

advance. Find out more about the tax-related provisions of the health 

care law at www.irs.gov/aca. 

2 
Q&A

Publication 4128 3 

References 

• Publication 17, Your 

Federal Income Tax (For 

Individuals) 

• Publication 505, 

Withholding and 

Estimated Tax 

• Publication 525, Taxable 

and Nontaxable Income 

• Form W-2, Wage and 

Tax Statement 

• Form W-4V, Voluntary 

Withholding Request 

• Form 1099-G, Certain 

Government Payments 

• Instructions and Form 

709, United States Gift 

Tax Return 

JOB LOSS: What Income is Taxable? 

The following Questions and Answers are provided by the Internal 

Revenue Service to clarify the tax implications of financial issues 

faced by workers who have lost their jobs. References are provided for 

additional information. 

Is severance pay taxable? 

Yes, severance pay is taxable in the year that you receive it. Your employer will 

include this amount on your Form W-2 and will withhold appropriate federal 

and state taxes. See Publication 525, Taxable and Nontaxable Income, for 

additional information. 

Is accumulated leave (vacation and/or sick pay) taxable? 

Yes, annual leave/vacation pay, and sick pay are calculated as wages by your 

employer and will be included in your Form W-2. 

Is unemployment compensation taxable? 

Yes, your state unemployment insurance benefits (up to 26 weeks) and your 

extended benefits are taxable. You may choose to have 10% withheld for 

federal taxes by completing Form W-4V. The State will provide you with a 

paper Form 1099-G or make it available electronically by January 31st of 

each year, showing the amount of taxable benefits paid in the prior year. See 

Publication 525 for additional information. 

What about gifts of cash and property from family or friends? 

Generally, the person who receives the gift is not liable for any taxes on the 

gift. If the gift produces income like interest, dividends or rent payments, the 

receiver would be responsible for taxes on that produced income. Each year 

there is a specific maximum amount that may be given that will not create a 

taxable event to either the giver or the receiver. Gifts in excess of this maximum 

may be subject to gift taxes by the gift giver. See Publication 17, Your Federal 

Income Tax (For Individuals) or Instructions to Form 709, United States Gift Tax 

Return, for additional information. 

If I am eligible for public assistance or food stamps, is it taxable? 

No. 

When will I get my final Form W-2 from my employer? 

Your employer must provide your Form W-2 by January 31st after the close of 

the calendar year. As an example, 2020 Forms W-2 are due to employees by 

January 31, 2021. 

What if my employer filed bankruptcy or went out of business, how do I 

get my Form W-2? 

In either case the employer must file and report your wages and withholding 

on a Form W-2 at year’s end. If you do not receive your Form W-2, try to 

contact your employer or their representative. If you are unsuccessful, the 

IRS can assist you in filing a substitute Form W-2 using your records. A good 

precaution is to keep year-to-date records or pay stubs until you receive your 

Form W-2. 
Q&A

Publication 4128 4 

JOB LOSS: What Income is Taxable? 

(continued) 

Can I file an early tax return and receive any refund due? 

No. Individual income tax returns are based on a calendar year and cannot be 

filed earlier than January of the next calendar year. By law, Internal Revenue 

Service cannot issue refunds claiming the Earned Income Tax Credit (EITC) or 

the Additional Child Tax Credit (ACTC) before mid-February. This applies to the 

entire refund − even the portion not associated with the EITC or ACTC. 

If I sell other assets like stocks, bonds, and investment property, are they 

immediately taxable? 

Not necessarily, however the sale of such assets should be reported. If you 

have a gain on the sale, it may generate an income tax liability. You should 

review your overall tax situation and make sure you have paid your taxes as 

required to avoid any estimated tax penalty. Information on estimated tax is in 

Publication 505, Withholding and Estimated Tax. 

What can I do if I owe taxes and cannot pay them? 

Contact the Internal Revenue Service as soon as possible to request a 

payment plan. Communication is the key to minimizing problems. 

Payment options include a short-term payment plan (paying in 120 days or 

less) or a long-term payment plan (installment agreement for payments longer 

than 120 days). You may qualify to apply online for one of these payment 

options. 

Is special assistance available on unresolved tax matters that create 

hardships? 

Yes, if you are experiencing economic harm, a systemic problem or are 

seeking help in resolving tax problems that have not been resolved through 

normal channels, you may be eligible for Taxpayer Advocate Services (TAS) 

assistance. 
Q&A

Publication 4128 5 

References 

• Publication 17, Your 

Federal Income Tax (For 

Individuals) 

• Publication 575, 

Pension and Annuity 

Income 

• Publication 590-A, 

Contributions to 

Individual Retirement 

Arrangements (IRAs) 

• Publication 590-B, 

Distributions from 

Individual Retirement 

Arrangements (IRAs) 

• Form 8606, 

Nondeductible IRAs 

JOB LOSS: Pensions/IRAs – What’s Next? 

The following Questions and Answers are provided by the Internal 

Revenue Service to help you handle financial issues with a tax impact 

which may arise if you lose your job. 

What if I withdraw money from my qualified retirement plan or Individual 

Retirement Arrangement (IRA)? 

Generally speaking, if you withdraw the funds before you reach eligible age, 

and do not roll it over into another qualified retirement plan or Individual 

Retirement Account (IRA) within 60 days, that amount will be taxable income 

in the year in which it is withdrawn. You may also have to pay an additional 

10% tax on those early distributions. There are special rules for computing tax 

on lump-sum distributions. See IRS Publication 17, Your Federal Income Tax 

(For Individuals) or Publication 575, Pension and Annuity Income for detailed 

information. 

Are there any “hardship” exceptions to the early distribution penalties? 

Yes, there two exceptions specifically related to job loss. The additional 10% 

tax does not apply for distributions from a qualified retirement plan if you are 

age 55 (age 50 for qualified public safety employees) in or after the year of 

separation from service. Also, you do not have to pay the additional tax on 

distributions during the year from an IRA that aren’t more than the amount you 

paid during the year for medical insurance for yourself, your spouse, and your 

dependents. To qualify, you must have: 

1. lost your job, 

2. received unemployment compensation paid under any federal or 


state law for 12 consecutive weeks because you lost your job,
 

3. received the distributions during either the year you received the 


unemployment compensation or the following year and
 

4. received the distributions no later than 60 days after you have been 

reemployed. 

For other exceptions not related to job loss but may apply, see Publication 

575 and Publication 590-B, Publication 590-B, Distributions from Individual 

Retirement Arrangements (IRAs). 

Can I move money from my qualified retirement plan into another qualified 

retirement plan or IRA? 

Yes, this is called a “rollover”. You can choose to have any part or all of an 

eligible rollover distribution paid directly to another qualified retirement plan 

that accepts rollover distributions or to a traditional or Roth IRA. 

If you choose the direct rollover option, or have an automatic rollover, no tax 

will be withheld from any part of the distribution that is directly paid to the 

trustee of the other plan. If any part of the eligible rollover distribution is paid to 

you, the payer must generally withhold 20% of it for income tax. 

However, the full amount is treated as distributed to you even though you 

actually receive only 80%. You generally must include in income any part 

(including the part withheld) that you don’t roll over within 60 days to another 

qualified retirement plan or to a traditional or Roth IRA. See Publication 575, 

Pension and Annuity Income for additional information. 
Q&A

Publication 4128 6 

JOB LOSS: Pensions/IRAs – What’s Next? 

(continued) 

If I made an IRA contribution during the current tax year, can I withdraw it 

before the close of the year? 

Yes. Contributions returned before the due date of the return can be withdrawn 

without penalty. You must take the contribution and any interest or dividend it 

may have earned. This is a tax-free event if: 

1. you do not take a deduction for the contribution and 

2. you withdraw any income or interest the investment made while in 


the IRA and include that amount in your income. See Publication 


590-A, Contributions to Individual Retirement Arrangements (IRAs) 


for more information.
 

I’ve had my IRAs for several years. In some of those years I didn’t benefit 

from any deduction due to my income. How do I figure what part of the 

distribution is taxable? 

If you had non-deductible IRA contributions, you would have completed Form 

8606, Nondeductible IRAs, to establish your basis (cost) in your combined 

IRAs. Use the worksheets in Publication 590-A and Publication 590-B to 

calculate what part of the distribution is taxable and complete Part I on Form 

8606 and attach it to your return. 

If I take my pension and transfer it to an IRA, are there any special rules or 

restrictions? 

Rolling over your pension distribution to a financial institution: (i.e., bank, credit 

union, brokerage house, etc.) is straightforward. Prohibited transactions with 

an IRA include: 

1. borrowing money against it, 

2. selling property to it, 

3. using it as security for a loan or pledging the IRA account as 


security or
 

4. buying property for personal use (present or future) with IRA funds. 

In general, there is a 15% tax on the amount of the prohibited 

transaction and a 100% additional tax if the transaction isn’t 

corrected. Review the information in Publications 575, 590-A and 

590-B for additional information. 

Who can I talk with to discuss distributions from my retirement accounts 

and the affect it will have on my tax liability? 

If you are unable to find the answers to your questions or have additional 

questions after researching Publications 17, 575, 590-A and 590-B, contact 

your plan administrator, financial planner or tax advisor. 
Q&A

Publication 4128 7 

References 

• Publication 15, (Circular 

E), Employer’s Tax 

Guide 

• Publication 334, 

Tax Guide for Small 

Businesses 

• Publication 505, 

Withholding and 

Estimated Tax 

• Publication 583, 

Starting a Business and 

Keeping Records 

• Publication 596, Earned 

Income Credit 

• Publication 4591, Small 

Business Federal Tax 

Responsibilities 

• Form 940, Employer’s 

Annual Federal 

Unemployment Tax 

Return 

• Form 941, Employer’s 

Quarterly Federal Tax 

Return 

• Form 1040, U.S. 

Individual Income Tax 

Return 

• Schedule C, Profit or 

Loss From Business 

(Sole Proprietorship) 

• Schedule SE, SelfEmployment Tax 

JOB LOSS: Starting Your Own Business 

Every new phase of life brings many challenges. The Internal Revenue 

Service recognizes that the loss of a job can create new tax situations 

for you. The following information is provided to clarify possible tax 

implications. 

Can I be an employee and a business owner in the same tax year? 

Yes. Under the tax law, you can be both an employee and a business owner at 

the same time if you choose. The primary issue is to report all income on your 

return. 

Where can I get information about starting my own business? 

Publication 334, Tax Guide for Small Business, Publication 583, Starting 

a Business and Keeping Records are free publications that have helpful 

information for small business owners. In addition, Publication 4591, Small 

Business Federal Tax Responsibilities, provides a summary of the reference 

material for the business owner. These products contain information on starting 

your own business, record keeping, and deductible expenses. 

What options do I have for organizing my business? 

Under the federal tax code, there are three options: Sole Proprietorship, 

Partnership or Corporation. A number of factors may influence your decision 

about which structure is best for you including cost of start-up, exposure to 

risk or liability, financing, and the tax implications. 

What record keeping requirements do I have as a Sole Proprietor? 

Generally, you should keep detailed records of your income and expenses 

for your business to prepare not only required tax returns but also financial 

statements to help in maintaining and growing your business. The same 

general rules apply for Partnerships and Corporations with some additional 

detail. 

How do I report my business income? 

As a sole proprietor, you will need to file a Form 1040, Schedule C, Profit or 

Loss From Business (Sole Proprietorship) to report your income and eligible 

business expenses. You may also be eligible to deduct up to 20 percent of 

qualified business income (QBI) from domestic businesses operated as sole 

proprietorship regardless of whether you itemize your deductions on Schedule 

A or take the standard deduction. Limitations for the QBI deduction may 

apply. For more information, please see Publication 334, Tax Guide for Small 

Business, and Publication 535, Business Expenses. 

What kinds of taxes do I pay as a sole proprietor? 

Taxes due on your net self-employment income (total business income minus 

expenses) include federal income tax and self-employment (Social Security 

and Medicare) taxes and they are reported on Schedule SE, Self-Employment 

Tax. Additional information is available in Publication 334, Tax Guide for Small 

Businesses. You are responsible for employment taxes if you have employees 

working in your business. See Publication 15, (Circular E), Employer’s Tax 

Guide, for details. 
Q&A

Publication 4128 8 

JOB LOSS: Starting Your Own Business 

(continued) 

How do I pay my taxes as a Sole Proprietor? 

Federal income taxes including Self-Employment tax use a pay-as-you-go 

system. Generally, you would pay using the 1040ES Estimated Tax process 

on a quarterly basis. You generally must make estimated tax payments if you 

expect to owe taxes of $1,000 or more when you file your return. For more 

information, see Publication 505. Employment taxes are paid using Forms 941, 

Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Annual 

Federal Unemployment Tax Return. The filing requirements for each of these 

forms and instructions on how to pay these taxes and due dates are included 

in the Publication 15, Circular E, Employer’s Tax Guide. 

Can I claim the Earned Income Credit on my net self-employment 

income? 

Yes, net income from a Sole Proprietorship is earned income and is one of the 

qualifications for earned income credit. The Earned Income Credit is available 

to taxpayers that meet certain income guidelines. See Publication 596, Earned 

Income Credit. 

Are classes or seminars available to get additional information? 

Yes. The Small Business/Self-Employed (SB/SE) Division of the Internal 

Revenue Service has a number of Small Business seminars through out the 

nation. If you are unable to attend small business tax workshops, meetings 

or seminars near your, consider taking Small Business Taxes: The Virtual 

Workshop online as an alternative option. Other online learning tools are also 

available on the SB/SE Tax Center. 
Q&A

Publication 4128 9 

References 

• Publication 502, 

Medical and Dental 

Expenses 

• Publication 523, Selling 

Your Home 

• Publication 596, Earned 

Income Credit 

• Publication 969, Health 

Savings Accounts and 

Other Tax-Favored 

Health Plans 

• Publication 970, Tax 

Benefits for Education 

• Form 1040, U.S. Income 

Tax Return 

• Schedule A, Itemized 

Deductions 

JOB LOSS: Miscellaneous Tax 

Information 

Every new phase of life brings many challenges. The Internal Revenue 

Service recognizes that the loss of a job can create new tax situations 

for you. The following information is provided to clarify the tax 

implications. 

If I sell my home, do I have to pay taxes on the money I make? 

Usually you do not have to pay tax on the first $250,000 ($500,000 on a joint 

return in most cases) of gain from the sale of your main home. Generally, you 

must have lived in and owned the home for at least two years of the five years 

prior to the sale and not excluded a gain on another home in the past two 

years. For more information, see Publication 523, Selling Your Home. 

Now I have to pay the full cost for my health insurance. Is this deductible? 

Health insurance premiums are includible in your medical and dental bills. 

They are deductible on Schedule A, if you itemize. Some limitations apply. See 

Publication 502, Medical and Dental Expenses, for more information. 

Can I deduct contributions I made to a Health Savings Account (HSA)? 

If you are an eligible individual, you can claim a tax deduction for contributions 

you, or someone other than your employer, make to your HSA even if you do 

not itemize your deductions on Form 1040. For more information 

see Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans. 

Can I claim the Earned Income Credit this year? 

Even though your income may have exceeded the thresholds for this credit in 

past years, you may be eligible for the credit this year. The credit is available 

to taxpayers who meet certain income guidelines. For more information, see 

Publication 596, Earned Income Credit. 

My chances of finding a new job will be better if I take a few college 

courses. Can I deduct any of my tuition? 

There are a number of tax benefits available for going to college or taking 

college courses. Some of the benefits are credits and others are deductions 

from your income. Refer to Publication 970, Tax Benefits for Education, for 

more information.