- Unemployment benefits are subject to federal income tax and possibly state income tax.
- Payments are taxed at your ordinary income tax rate, like wages.
- If you can't afford to pay all the tax due, you can apply for an installment plan.
If you receive any amount of unemployment benefits, the money is taxable income.
As far as the Internal Revenue Service is concerned, your unemployment payments are treated just like any other regular income. But how much you'll have to pay at the state tax level, if anything, will depend on where you live.
Federal tax rules for unemployment
Taxability of unemployment benefits
Unemployment benefits are generally taxed the same way as income from a job. The payments must be reported and are included as part of your gross income on your federal tax return. One notable difference: Unemployment benefits are not subject to FICA taxes, which are federal payroll taxes.
In most cases, you will apply for and receive unemployment insurance payments from your state, which will then be reported to the IRS. However, there are other types of benefits funded by the federal government but paid through your state that also fall under the category of unemployment.
Other programs provide unemployment insurance to specific industries, such as railroad unemployment compensation benefits and unemployment assistance under the Airline Deregulation Act of 1978. There are also programs for federal employees and ex-military service members.
All unemployment assistance you receive should be included in your gross income. If you're unsure whether to include a payment when preparing your tax return, use the interactive tool on the IRS website.
Reporting unemployment on your tax return
If you receive $10 or more in unemployment benefits, you should get Form 1099-G in the mail by the end of January.
It shows the total unemployment income you collected and how much of it, if any, was withheld for federal taxes, and state taxes if applicable. These figures should be reported on Schedule 1 of Form 1040, and filed as part of your federal income tax return. State withholding is reported on your state tax return.
Withholding taxes from unemployment
If you want your taxes automatically taken from your benefit check or direct deposit before you get paid, like they would be from a traditional paycheck, then you need to file Form W-4V or the voluntary withholding form provided by your state.
This will instruct the state to withhold 10% of each payment for federal income taxes. It will also take a portion of the money for state taxes, if applicable.
State tax rules for unemployment
Variations in state tax rules
Nine states have no income tax or only collect it on interest and dividend income from investments: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Residents will still owe federal income tax on their unemployment benefits, however.
Four states do levy a personal income tax make an exception for unemployment benefits: California, New Jersey, Pennsylvania, and Virginia.
How to find your state's rules
Your state's tax agency can help determine if and how unemployment is taxed. You'll find a list of their websites here. You can also consult a local tax professional, such as a certified public accountant (CPA), for one-on-one assistance.
Managing your tax liability
Making estimated tax payments
Instead of withholding taxes from your benefit checks, you can make quarterly payments directly to the IRS for the amount you estimate you'll owe. Keep in mind that this method requires doing some calculations and meeting payment deadlines on January 15, April 15, June 15, and September 15. It may result in a penalty charge if you underpay.
Applying for an installment plan
Paying taxes on unemployment insurance payments can seem counterintuitive since most recipients either are out of work or recently have been. This could lead to a situation where you have a tax bill that you can't afford to pay.
In such a case, it's important that you still file a return. If you're unable to pay the tax you owe by your original filing due date, the balance is subject to interest and a monthly late payment penalty. There's also a penalty for failure to file a tax return. So try to file on time, whether or not you can afford to pay the full balance due.
If your tax bill is too much for you to pay right now, pay as much as you can to reduce the amount of interest that will accrue. You can also apply to pay the balance in monthly installments. You can request an installment agreement online through the IRS website, by filling out Form 9465, or contacting the IRS for help.
FAQs on how unemployment is taxed
Are unemployment benefits considered income?
Yes, unemployment benefits are considered income. They count toward your gross income at the federal level, meaning they're taxed at your ordinary income tax rate. Unemployment benefits may be exempt from state taxes if you live in a state that doesn't tax personal income or otherwise makes an exception for unemployment compensation.
Can I choose not to have taxes withheld from my unemployment?
By default, taxes are not withheld from unemployment payments. In order to have taxes withheld, you need to file a form with your state government. If your state does not provide a form online, you may use IRS Form W-4V.
How do I report unemployment benefits if I didn't receive a Form 1099-G?
If you didn't receive a Form 1099-G, it is available on many states' websites. If not, contact your state government to request a new copy of the form. The IRS requires that anyone who received unemployment benefits report the full amount on their federal tax return, whether or not they receive Form 1099-G.
What should I do if I can't pay the taxes on my unemployment benefits?
Even if you can't pay the taxes on your unemployment benefits, always file your tax return on time and pay what you can, The IRS offers reasonable payment plans so you can pay off your balance with minimal interest charges and fees, and your state may too. You can apply for a payment plan online or over the phone.
Are there any tax credits or deductions available to offset unemployment benefits?
Your unemployment compensation is taxed together with all other ordinary income, such as wages. If you qualify for a tax deduction or tax credit, it will lower your overall tax liability. Note that unemployment benefits are not earned income, so they can't be used to claim the earned income tax credit. However, as taxable income, they may affect the amount of EITC for which you are eligible.