Unemployment income is taxable, but you can choose to have taxes withheld from your payments

Unemployment benefits count as income to the federal government and most states. You owe income tax on what you receive, just as you would on wages. The tax rate depends on your total income for the year, your filing status, and your state — not on the unemployment amount alone.

You have a choice: you can let taxes be withheld from each payment (usually 10 percent federal), or you can receive the full amount and pay taxes when you file your return. Most people who have other income or expect to owe money choose withholding. Those with low total income sometimes skip it and handle the tax bill later.

Key Takeaways

  • Federal income tax applies to all unemployment benefits; most states also tax them, though a few do not.
  • You can request 10 percent federal withholding when you file your claim or change it anytime during your benefit period.
  • If you do not withhold, you may owe a lump sum when you file your tax return, and you could face penalties if you owe more than a certain amount.
  • Your total tax bill depends on all your income that year, not just unemployment, so a tax professional can help you decide whether to withhold.
  • Some states do not tax unemployment at all, while others tax it like regular income; your state determines its own rate.

Federal tax withholding and how to set it up

The federal government taxes unemployment benefits as ordinary income. When you file your initial claim, most state unemployment offices ask whether you want federal income tax withheld. The standard withholding rate is 10 percent of each weekly or biweekly payment.

If you said no at the time of filing, you can change your mind later. Contact your state unemployment office — usually through their online portal or by phone — and request to start withholding. You can also stop withholding if your situation changes. The change typically takes effect within one or two payment cycles.

Withholding does not mean you will owe nothing at tax time. It is an estimate based on 10 percent, which may be too much or too little depending on your other income, deductions, and filing status. A single person with only unemployment income might over-withhold and get a refund. Someone with a spouse's wages plus unemployment might under-withhold.

State unemployment taxes vary widely

Nine states do not tax unemployment benefits at all: Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, and Wyoming. If you live in one of these states, you owe only federal tax.

Every other state taxes unemployment as income, but the rate varies. Some states use the same tax brackets as regular wages. Others have a flat rate. A few states allow you to request withholding just as the federal government does; most do not offer that option and instead expect you to pay when you file your state return.

Your state unemployment office website lists whether your state taxes benefits and at what rate. If you move during your benefit period, the rules of the state paying you apply, not the state where you now live.

What happens if you do not withhold taxes

If you choose not to have taxes withheld, you receive your full unemployment payment each week or every two weeks. When you file your federal tax return, you report the total unemployment you received that year as income. The IRS calculates what you owe based on your tax bracket.

If you owe more than $1,000 in federal income tax for the year and did not have enough withheld or make quarterly estimated payments, you may face an underpayment penalty. The penalty is small — usually a few dollars — but it adds to what you already owe. You can avoid it by having withholding taken now, or by making quarterly estimated tax payments if you expect a large bill.

State penalties work the same way. If your state taxes unemployment and you owe more than the threshold (which varies by state, typically $500 to $1,000), you may owe a penalty on top of the tax itself.

How to calculate what you might owe

Your total tax bill depends on all your income for the year, not just unemployment. If you have a job, a spouse's income, investment income, or other sources, those all factor in. A rough estimate: if unemployment is your only income and you received $15,000 in benefits, you might owe roughly $1,500 to $2,000 in federal tax, depending on your filing status and deductions. But that is a starting point, not a may provide.

The IRS provides a tax withholding estimator on its website (irs.gov). You enter your expected income from all sources, and it tells you roughly how much to withhold. A tax professional or your state's tax office can also help you figure out whether 10 percent withholding is enough for your situation.

Keep in mind that if you received Pandemic Unemployment Assistance (PUA) or Pandemic Emergency Unemployment Compensation (PEUC) during 2020 or 2021, those benefits are also taxable. If you did not have taxes withheld on those payments, you will owe tax on them when you file.

Withholding for people with very low income

If unemployment is your only income and your total is below the standard deduction for your filing status, you will not owe federal income tax. In 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly. If your unemployment income is below that, you can skip federal withholding and will not owe anything at tax time.

However, you still need to file a tax return to claim any refundable tax credits you might be may have access to to — such as the Earned Income Tax Credit (EITC) if you also had some wages. Your state may also have a lower threshold for taxation, so check your state's rules even if you do not owe federal tax.

What to do if you already received benefits without withholding

If you received unemployment without having taxes withheld and now realize you will owe money, you have options. You can request withholding on any remaining benefits you are still receiving. You can also make quarterly estimated tax payments to the IRS (Form 1040-ES) to reduce the penalty. Or you can wait and pay the full amount when you file your return.

If you owe a large amount and cannot pay it all at once, the IRS allows payment plans. You can set up an agreement to pay monthly, and the interest and penalties are lower than if you simply do not pay. Contact the IRS or work with a tax professional to set up a plan.

Frequently Asked Questions

Do I have to pay taxes on unemployment if I am still working part-time?

Yes. Both your wages and your unemployment benefits are taxable income. Your total tax bill is based on the combined amount. You may want to increase withholding on your wages or request federal withholding on unemployment to avoid a large bill at tax time.

Can I get a refund if too much tax was withheld from my unemployment?

Yes. If you had 10 percent withheld but your actual tax bill is lower, you will receive a refund when you file your return. This often happens if unemployment was your only income and the withholding exceeded what you actually owed.

What if I received unemployment in one state but moved to another?

The state that paid you determines the tax rules. If you received benefits from State A and then moved to State B, you owe tax according to State A's rules. However, some states have reciprocal agreements or allow credits, so check both states' tax websites or ask a tax professional.

Is there a way to avoid paying taxes on unemployment?

No. Unemployment benefits are taxable income under federal law and the laws of most states. You cannot avoid the tax, but you can manage when and how you pay it by choosing withholding, making estimated payments, or setting up a payment plan if you owe at tax time.

Do I need to file a tax return if I only received unemployment?

If your unemployment income is below the standard deduction for your filing status, you are not required to file federally. However, you should file if you are may have access to to a refundable credit like the EITC, or if your state requires it. Check your state's rules and consider filing anyway — you may get money back.