Unemployment benefits are taxable income

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

The amount you owe depends on your total income for the year, your filing status, and whether you had other income besides unemployment. If you received a large unemployment payment in a single year, you may end up in a higher tax bracket than you expected, which can mean owing money at tax time instead of getting a refund.

Key Takeaways

  • Unemployment benefits are subject to federal income tax and state income tax in most states, even though you do not pay Social Security or Medicare tax on them.
  • You can have taxes withheld from your unemployment check when you first claim benefits, which prevents a large tax bill later.
  • If you do not have taxes withheld, you may owe money when you file your return, so setting aside 10 to 12 percent of your benefits is a practical safeguard.
  • You will receive a Form 1099-G in January showing the total unemployment you received, which you must report on your tax return.
  • Some people can exclude part of their unemployment from taxes under the American Rescue Plan rules, but this only applies to 2020 and 2021 income.

Withholding taxes from your unemployment check

When you first file for unemployment, you have the option to have federal income tax withheld from your benefits. The standard withholding rate is 10 percent. Choosing withholding means less money in your pocket each week, but it reduces the risk of owing a large amount when you file your tax return.

If you do not elect withholding when you claim benefits, you can usually change your election later through your state's unemployment website or by contacting your state's unemployment office. The process varies by state, so check your state's specific instructions. Withholding is voluntary — you are not required to do it, but it is often the simpler choice if you know you will owe taxes.

What happens if you do not withhold taxes

If you receive unemployment without having taxes withheld, you are responsible for paying the tax when you file your return. Depending on your total income and filing status, you might owe anywhere from 10 to 37 percent of your benefits in federal tax alone, plus state tax. Many people are surprised by this bill because they think of unemployment as a temporary safety net, not taxable income.

A practical approach is to set aside 10 to 12 percent of each unemployment check in a separate account. This is not a may provide — your actual tax bill depends on your specific situation — but it creates a buffer so you are not caught off guard. If you set aside more than you owe, you will get the difference back as a refund when you file.

Form 1099-G and reporting on your tax return

In January of the year after you received unemployment, your state will send you a Form 1099-G. This form shows the total amount of unemployment benefits you received in the previous year. You must report this amount on your federal tax return, on the line for unemployment compensation.

Keep your 1099-G with your tax records. If you file electronically, the IRS already has a copy, so the numbers must match. If there is an error on the form — for example, if the amount is wrong — contact your state's unemployment office to request a corrected form before you file your return.

State income tax on unemployment

Most states tax unemployment benefits as income, but a few do not. States that do not tax unemployment include Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you still owe federal tax, but you do not owe state tax on your benefits.

If you live in a state that does tax unemployment, the amount depends on your state's tax brackets and rates. Some states allow you to have state tax withheld from your benefits at the same time you elect federal withholding. Check your state's unemployment website or ask when you file your claim.

The American Rescue Plan exclusion (2020 and 2021 only)

Under the American Rescue Plan, passed in March 2021, people who received unemployment in 2020 could exclude up to $10,200 of those benefits from their taxable income. This was a one-time relief measure. If you received unemployment in 2020 and filed your return before this law passed, you may have been able to file an amended return to claim the exclusion and receive a refund.

This exclusion applied only to 2020 income. Unemployment received in 2021 and later years is fully taxable with no exclusion. If you are unsure whether you claimed this correctly, a tax professional or your state's tax authority can review your return.

Planning ahead if you expect a large tax bill

If you received a substantial unemployment payment in a single year, you may want to plan for taxes before you file. One option is to make estimated tax payments to the IRS during the year you receive benefits, which spreads the tax burden across the year rather than creating a lump-sum bill in April. Another option is to adjust your withholding if you have other income from a job.

A tax professional can help you estimate what you will owe based on your total income and filing status. This is especially useful if you had unemployment plus wages, self-employment income, or other sources of income in the same year, because the combination affects your tax bracket.

Frequently Asked Questions

Do I have to pay Social Security and Medicare tax on unemployment?

No. You do not pay FICA taxes (Social Security and Medicare) on unemployment benefits. You only pay federal income tax and state income tax (in states that tax unemployment). This is one of the few ways unemployment differs from regular wages.

What if I did not have taxes withheld and cannot pay what I owe?

Contact the IRS. You can set up a payment plan to pay your tax bill over time, or you may be able to request a short-term extension. The IRS also has hardship programs for people who cannot pay immediately. Do not ignore the bill — penalties and interest accrue if you do not pay or make arrangements.

Can I claim unemployment benefits as a deduction on my taxes?

No. Unemployment is income, not a deductible expense. You report it as income on your return, but you cannot deduct it. You can deduct other things like job-search expenses or professional fees, but not the unemployment itself.

If I received unemployment in two different states, do I owe tax in both?

You owe federal tax on all unemployment you received, regardless of which state paid it. For state tax, you owe tax to the state where you worked and received benefits. If you moved between states during the year, you may owe tax to more than one state, but you typically do not pay tax twice on the same income.

Will unemployment affect my tax refund or cause me to owe money?

It depends on your total income and withholding. If unemployment was your only income and you had 10 percent withheld, you might get a refund. If you had other income or did not have taxes withheld, you could owe money. Your actual result depends on your specific situation and filing status.