California taxes unemployment benefits as income, but the federal government does not

California treats unemployment insurance as taxable income and withholds state income tax from your benefits automatically. The federal government does not tax unemployment benefits federally, so you will not see federal withholding on your payment. This means your California state tax bill may be higher than you expect when you file your return, even though you received less money than the benefit amount stated.

The withholding rate is set by California and currently stands at a flat percentage of your weekly benefit amount. You can adjust how much is withheld or request no withholding at all, though choosing zero withholding means you may owe a lump sum when you file your state return.

Key Takeaways

  • California withholds state income tax from unemployment benefits at a flat rate, but the federal government does not tax unemployment at all.
  • You can change your withholding rate or stop withholding entirely by submitting a form to the Employment Development Department (EDD).
  • If you choose not to withhold taxes, you will owe the full amount when you file your California state return, so setting aside money is important.
  • Your actual tax liability depends on your total income for the year, not just the unemployment amount.
  • Unemployment benefits count as income for California's Earned Income Tax Credit (EITC) calculations, which may reduce what you owe.

How California withholding works

When you receive an unemployment payment from the EDD, California automatically withholds a percentage for state income tax. This withholding is deducted from your benefit before you receive the money, so the amount that hits your bank account is already reduced.

You can see the withholding amount on your EDD payment stub or in your online account. The withholding is based on your weekly benefit amount and the current state tax rate. Unlike federal income tax withholding from a job, there is no calculation based on your W-4 or personal circumstances — it is a flat percentage applied to everyone.

Changing or stopping your withholding

If you want to change how much California withholds from your unemployment, you must submit a request to the EDD. You can request a different withholding rate, request that no taxes be withheld, or request that withholding resume if you previously stopped it.

The form to use is the DE 8288, which you can submit online through your EDD account, by mail, or by phone. Changes typically take effect within one to two weeks of submission. If you request zero withholding and later change your mind, you can submit another DE 8288 to restart withholding at any time.

What happens if you do not withhold taxes

If you choose not to have California withhold taxes from your unemployment, you will owe the full tax liability when you file your state return. This can mean a large bill due on April 15, so many people set aside a portion of each unemployment payment to cover the tax they will owe.

The amount you owe depends on your total income for the year, your filing status, and whether you have dependents or other deductions. Unemployment benefits are added to any wages, self-employment income, or other income you received during the year to calculate your total taxable income.

How unemployment income affects your total tax bill

Your unemployment benefits are added to all other income you earned in the year to determine your California state tax bracket and your total tax liability. If you had a job for part of the year and then received unemployment, both the wages and the benefits count toward your income.

This can push you into a higher tax bracket than you would have been in with wages alone, meaning you may owe more in taxes than if you had simply earned the same total amount as regular wages. The interaction between unemployment and other income is why your actual tax bill may surprise you when you file.

Unemployment and the California Earned Income Tax Credit

If your income is low enough, you may be may be able to access for California's Earned Income Tax Credit (EITC), which reduces the amount of state tax you owe. Unemployment benefits count as income for EITC purposes, which can affect whether you may have access to or how much credit you receive.

The EITC is calculated based on your total income for the year, so receiving unemployment may reduce your credit compared to a year when you earned only wages. You can claim the EITC when you file your state return, and the Franchise Tax Board will calculate it for you if you do not claim it yourself.

Planning ahead for your tax bill

If you are receiving unemployment and want to avoid a large tax bill in April, the simplest approach is to keep the default withholding in place. This spreads the tax cost across your benefit payments rather than requiring a lump sum later.

If you choose to stop withholding, set aside 10 to 15 percent of each unemployment payment in a separate account so the money is available when you file your return. You can also use the California tax calculator on the Franchise Tax Board website to estimate what you will owe based on your expected total income for the year.

Frequently Asked Questions

Does the federal government tax California unemployment benefits?

No. The federal government does not tax unemployment benefits at all, so you will not owe federal income tax on them. Only California state income tax applies to unemployment in California.

Can I change my withholding after I have already received payments?

Yes. You can change your withholding at any time by submitting form DE 8288 to the EDD. Changes take effect within one to two weeks. Changing your withholding does not affect payments you have already received.

What if I owe more in taxes than I can pay?

Contact the Franchise Tax Board to discuss payment options. You may be able to set up a payment plan, request an extension, or claim hardship relief depending on your situation. The FTB website has information on payment arrangements.

Will unemployment benefits affect my federal tax return?

No. Unemployment is not taxed federally, so it does not appear on your federal return and does not affect your federal tax bill or your federal EITC.