Unemployment benefits are taxable income

Yes, you owe federal income tax on unemployment benefits. The IRS treats unemployment as ordinary income, the same way it treats wages from a job. You do not have to pay Social Security or Medicare taxes (called FICA taxes) on unemployment, but you do owe federal income tax, and in most states you also owe state income tax.

The amount you owe depends on your total income for the year, your filing status, and whether you have other income besides unemployment. If unemployment is your only income and the total is below the standard deduction for your filing status, you may owe nothing. If your total income is higher, you will owe tax at your ordinary rate.

The state that pays your unemployment benefit is the one that may tax it. If you live in one state but worked in another, the state where you collected the benefit is what matters for state tax purposes.

Key Takeaways

  • Federal income tax is owed on all unemployment benefits you receive, and most states also tax unemployment income.
  • You can have taxes withheld from your benefit payments when you file your claim, or you can pay when you file your tax return.
  • If you do not withhold taxes and owe more than $1,000 at tax time, you may owe a penalty for underpayment.
  • The IRS Form 1099-G, sent to you and the IRS, reports your total unemployment for the year and is required to file your return accurately.
  • States with no income tax do not tax unemployment, but federal tax still applies no matter where you live.

How withholding works when you receive benefits

When you file your initial unemployment claim, you will be asked whether you want federal income tax withheld from your weekly or biweekly payments. If you say yes, the state will hold back 10 percent of each payment and send it to the IRS on your behalf. This is optional, but it is the simplest way to avoid a large tax bill at the end of the year.

If you choose not to withhold, you are responsible for setting aside money to pay the tax when you file your return. Many people who do not withhold end up owing more than they expected because they spend the full benefit amount and have nothing left when taxes are due.

You can change your withholding choice after you have started receiving benefits. Contact your state unemployment office to request a change. The change usually takes effect within one or two weeks.

What happens at tax time

In January or February of the year after you received benefits, your state will mail you a Form 1099-G. This form shows the total unemployment you received in the previous year and the amount of federal tax withheld, if any. You must report this information on your federal tax return, even if no tax was withheld.

If you withheld 10 percent throughout the year, that amount is credited against your total tax liability. If you owe more than was withheld, you pay the difference when you file. If more was withheld than you owe, you receive a refund.

You will also need to report unemployment on your state tax return if your state taxes it. Some states include the 1099-G information in their system automatically; others require you to enter it manually. Check your state's tax instructions to confirm.

States that do not tax unemployment

Nine states do not tax unemployment income at the state level: Alaska, Florida, Illinois, Mississippi, Missouri, Nevada, North Carolina, South Dakota, Tennessee, and Wyoming. If you live in one of these states, you still owe federal income tax, but you do not owe state tax on your unemployment benefit.

If you lived in a state that taxes unemployment when you received the benefit, but have since moved to a state that does not, you still owe tax to the state where you collected the benefit. The state that paid you is the one that can tax you.

Penalties for underpayment

If you do not withhold taxes and your total tax bill for the year is more than $1,000 higher than the tax already paid through withholding or estimated payments, the IRS may charge you an underpayment penalty. This penalty is separate from the tax you owe and is calculated based on how much you underpaid and for how long.

You can avoid this penalty by withholding 10 percent from your benefits, or by making quarterly estimated tax payments if you have other income. If you expect to owe more than $1,000, withholding is the easiest option because it happens automatically.

What to do if you cannot pay your tax bill

If you file your return and owe tax but cannot pay the full amount, you have options. You can set up a payment plan with the IRS, request an extension to pay, or in some cases request that the IRS temporarily delay collection while you work out your finances.

Contact the IRS at 1-800-829-1040 to discuss your situation. The IRS has programs for people who cannot pay in full, and setting up a plan is better than not paying at all, which can result in additional penalties and interest.

Frequently Asked Questions

Do I have to file a tax return if unemployment is my only income?

It depends on the amount. For 2024, if you are single and your only income is unemployment, you must file if your total income is more than $14,600. If you are married filing jointly, the threshold is higher. Even if you do not have to file, you should file if tax was withheld, because you may receive a refund.

What if I received unemployment in two different states?

You will receive a separate 1099-G from each state. Report both on your federal return. For state taxes, you owe tax to each state where you received benefits, based on that state's rules. Some states have agreements to avoid taxing you twice, but you should check with both states' tax agencies to be sure.

Can I deduct anything from my unemployment income?

No. Unemployment is reported as gross income on your 1099-G, and you cannot deduct job-search expenses, training costs, or other related expenses. You report the full amount and calculate your tax based on your total income for the year.

What if the 1099-G amount is wrong?

Contact your state unemployment office immediately and ask them to issue a corrected form. They will send a corrected 1099-G to you and the IRS. Do not file your tax return until you have the correct form, because the IRS will match your return against the 1099-G they received.

Does unemployment count as income for other programs?

Yes. Unemployment is counted as income for programs like SNAP, Medicaid, housing assistance, and others. The amount reported on your 1099-G is what counts, not the amount after taxes. Report your gross unemployment when you apply for other assistance.