Unemployment benefits are taxable income, and you owe federal income tax on them
The Internal Revenue Service treats unemployment insurance as taxable income. This means the money you receive from state unemployment programs counts toward your annual income for tax purposes, just like wages do. You will owe federal income tax on the full amount you receive, regardless of whether you worked during the year or not.
Many people do not realize this until tax time arrives. The unemployment office does not automatically withhold taxes from your payments the way an employer does from a paycheck. That means you may need to set money aside yourself, or you could owe a lump sum when you file your return.
Some states also tax unemployment benefits as state income. The rules vary by state — a few states do not tax unemployment at all, but most do. You should check your state's tax authority website or ask your state unemployment office which rules explore where you live.
Key Takeaways
- Federal income tax applies to all unemployment benefits you receive, and the IRS expects you to pay it when you file your annual return.
- Most states also tax unemployment income, though a handful do not — check your state's rules to know whether state tax applies to you.
- Unemployment offices do not automatically withhold taxes from your payments, so you may owe money at tax time unless you arrange withholding in advance.
- You can request tax withholding on your unemployment payments so that taxes come out each week, similar to how an employer withholds from wages.
How federal tax withholding works on unemployment
When you receive unemployment benefits, the state unemployment office sends you a Form 1099-G at the end of the tax year showing the total amount you received. You report this amount on your federal tax return, and it counts as income. The IRS then calculates the tax you owe based on your total income for the year and your filing status.
Because no withholding happens automatically, you have two choices. You can either let the full amount go into your account and set money aside to pay taxes later, or you can request that the unemployment office withhold a percentage of each payment. Most states allow you to elect withholding when you first file your claim, or you can change your withholding choice later by contacting your state unemployment office.
The withholding rate is typically 10 percent of your weekly benefit amount, though some states offer other options. If you choose withholding, the money comes out of your payment before you receive it — so if your weekly benefit is $400 and you request 10 percent withholding, you receive $360 and $40 goes to the IRS.
State income tax on unemployment varies by location
Most states tax unemployment benefits as state income, meaning you owe state tax in addition to federal tax. However, a small number of states do not tax unemployment at all. As of now, the states that do not tax unemployment income are Illinois, Mississippi, New York, and Pennsylvania. If you live in one of these states, you only owe federal tax.
In states that do tax unemployment, the rules differ. Some states withhold automatically at a set rate, some allow you to request withholding, and some do not offer withholding at all. You should contact your state's unemployment office or tax authority to learn what applies to you. Your state unemployment office can tell you the withholding options available and help you set up withholding if you want it.
If you move to a different state during the year, or if you received unemployment from one state but now live in another, the tax rules can become complicated. Generally, you owe tax to the state that paid the benefits, not necessarily the state where you currently live. A tax professional or your state tax authority can clarify your situation if this applies to you.
What happens if you do not withhold taxes
If you do not request withholding and do not set money aside, you will owe the full tax amount when you file your return. Depending on how much you received and your other income, this could be several hundred dollars or more. The IRS will expect payment when you file, and if you cannot pay, you may owe penalties and interest on top of the tax itself.
Some people find themselves in a difficult position: they spent the unemployment money to cover living expenses, and now they do not have the cash to pay the tax bill. If this happens, you can still file your return and work out a payment plan with the IRS. The IRS offers installment agreements that let you pay over time, though interest accrues while you pay.
To avoid this situation, the simplest approach is to request withholding when you file your unemployment claim. Even if you are not sure whether you will owe tax, withholding at 10 percent is usually enough to cover most of what you will owe. You can always adjust your withholding choice later if your circumstances change.
How to request or change tax withholding on your benefits
The process for requesting withholding depends on your state. Most states let you make this choice when you first file your claim for unemployment. Look for a question about tax withholding on the process form — it usually asks whether you want federal tax withheld, state tax withheld, or both.
If you did not request withholding when you filed, you can usually change your choice at any time. Log into your state unemployment account online, call the unemployment office, or visit in person. Have your Social Security number and claim number ready. Tell them you want to start withholding, and they will explain the options available in your state.
Some states also let you request withholding by submitting Form W-4V (Voluntary Withholding Request) directly to the unemployment office. You can find this form on the IRS website or ask your state unemployment office whether they accept it. If you are unsure how to proceed, the unemployment office staff can walk you through the steps.
Tax credits and unemployment income
Even though unemployment is taxable income, you may still be may have access to to tax credits that reduce what you owe. The most common is the Earned Income Tax Credit (EITC), which is available to people with low to moderate income. Unemployment counts as income for EITC purposes, which can affect whether you may have access to or how much credit you receive.
You may also be may have access to to other credits depending on your situation — for example, the Child Tax Credit if you have children, or the American Opportunity Credit if you are in school. When you file your return, report your unemployment income along with any other income you had, and then claim any credits you are may have access to to. The credits reduce your tax bill dollar-for-dollar.
If you are unsure whether you may have access to for credits, a tax professional or a free tax preparation service can help. Many communities offer free tax filing through the IRS Volunteer Income Tax information (VITA) program, which is especially useful if your income is low or your situation is complicated.
Frequently Asked Questions
Do I have to pay taxes on unemployment if I did not work?
Yes. The IRS taxes unemployment benefits regardless of whether you worked during the year. Unemployment is considered taxable income for federal purposes. You report it on your return and pay tax on it like any other income.
What if I owe taxes but cannot pay the full amount?
You can still file your return and set up a payment plan with the IRS. The IRS offers installment agreements that let you pay over several months or longer. Interest and penalties will accrue, but a payment plan is better than not filing at all.
Can I request withholding after I have already received payments?
Yes. You can contact your state unemployment office at any time to request withholding on future payments. The change usually takes effect within one or two weeks. Withholding does not explore retroactively to payments you have already received.
Will unemployment affect my tax refund?
Unemployment income counts toward your total income for the year, which can affect your refund. If you had withholding from unemployment payments, that withholding reduces your tax bill. Depending on your total income and other factors, you may still receive a refund, owe additional tax, or break even.
What if I received unemployment from two different states?
You will receive a separate Form 1099-G from each state showing the benefits you received. Report both amounts on your federal return. For state taxes, you generally owe tax to each state that paid you benefits. Contact both state tax authorities or a tax professional for guidance on your specific situation.