Question

Can you create a unique scenario in which a taxpayer receives one of these benefits? Explain why the benefits would or would not be taxable.

Worker’s compensation benefits

Social Security benefits

Unemployment compensation

Can you create a unique scenario in which a taxpayer receives one of these benefits? Explain why the benefits would or would not be taxable.

Answer 1

Unemployment compensation is a benefit paid by government to workers who have lost their jobs due to job cut or if company is not able to pay the wages. It is also called as unemployment benefits. They are paid if they lose their job without their fault of own. It is usually paid by direct transfer to worker's accounts or giving them a check. Unemployment compensation are paid by many countries. In Canada,the benefit is contributed by both employer and employee during employment.
For example, people are working in a call center and attend calls from Americans. Suddenly, job cut is announced to 1/3rd of the employed people because of the reduction of calls received from their clients and 1/3rd of the employees loose their jobs without their fault of own. These employees will be paid Unemployment compensation benefits.

Unemployment compensation benefits are taxable by the federal government for the tax payers. IRS has defined income in its code. Unemployment benefits are taxable with this definition of income.They are paid to the workers for their benefit and provides a justice to this system. The benefits are not exactly wages but they help the workers to get through the tough phase of unemployment. Unemployment compensation benefits is a mode of extra income. The benefits meet the basic definition of income under IRS code and hence taxable. They are not taxed by state, they are taxed only by federal government. Tax amount assessed with this benefit is very less as compared to the tax assessed when employee would have been working and receiving wages.