By TurboTax The IRS considers unemployment compensation to be taxable income—which you must report on your federal tax return. Key Takeaways • The IRS and some states consider unemployment compensation to be taxable income, which you must report on your federal tax return. • The amount of compensation to report will be located in Box 1 of Form 1099-G “Certain Government Payments,” which your state unemployment division will issue to you. Keep this form with your tax records. • Report your unemployment compensation on Schedule 1 of your federal tax return in the “Additional Income” section and …