Federal income tax is withheld from unemployment benefits unless you request otherwise

Unemployment benefits count as taxable income to the federal government. When you receive a payment, your state unemployment office withholds 10 percent for federal income tax by default — unless you tell them to stop. This means if you receive $500 per week, $50 goes to federal tax withholding and you get $450.

You can change this withholding at any time by contacting your state unemployment office or logging into your online account. Some people choose to have no tax withheld and pay the full amount when they file their tax return. Others increase withholding if they expect to owe more than 10 percent. The choice is yours, but the tax obligation exists either way.

You will receive a Form 1099-G from your state in January or February showing the total unemployment you received that year and how much federal tax was withheld. You use this form when you file your federal tax return.

Key Takeaways

  • Federal tax withholding on unemployment is 10 percent by default, but you can request zero withholding or a different amount through your state office.
  • State income tax on unemployment varies: some states tax it, some do not, and some let you choose whether to have it withheld.
  • You report all unemployment income on your federal tax return using the Form 1099-G your state sends you in early year.
  • If you did not have enough tax withheld during the year, you may owe money when you file; if too much was withheld, you may receive a refund.

State income tax on unemployment depends on where you live

Thirteen states do not tax unemployment benefits at all: Alabama, Alaska, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Nevada, North Carolina, Pennsylvania, and Tennessee. If you live in one of these states, you owe no state income tax on your unemployment payments.

The remaining states do tax unemployment. Most withhold state income tax automatically, similar to federal withholding. The percentage varies by state — it is typically between 2 and 6 percent of your weekly benefit amount. You can usually request zero withholding or a different rate through your state unemployment office, just as you can with federal tax.

A few states, including Virginia and New Jersey, let you choose whether to have state tax withheld at all. If you choose not to have it withheld, you will owe the tax when you file your state return.

How to calculate what you might owe at tax time

Your total tax bill depends on three things: how much unemployment you received, how much was withheld, and your other income for the year.

Start with the total shown on your Form 1099-G. Subtract the federal withholding amount (also on the form). That is the federal tax you still owe, unless your total income for the year is low enough that you do not have to file a return at all. If you had other income — from a job, self-employment, or investments — your unemployment is added to that, and your total tax is calculated on the combined amount.

The same process applies to state tax. If your state taxes unemployment and withheld state tax, subtract that from what you owe. If your state taxes unemployment but you requested zero withholding, you owe the full state tax on the amount shown on your Form 1099-G.

Use the IRS tax tables or a tax software tool to see your actual liability. The IRS website has free filing tools if your income is below a certain threshold (the threshold changes each year).

What happens if you did not have enough tax withheld

If the tax withheld during the year was less than what you actually owe, you will owe the difference when you file your return. For example, if you received $10,000 in unemployment and $1,000 was withheld (10 percent), but your total tax liability is $1,500, you owe $500 more.

You can pay this amount when you file your return. The IRS allows payment plans if you cannot pay in full, and you can set up a payment arrangement through their website or by calling them.

To avoid this situation next year, you can request higher withholding now. Contact your state unemployment office and ask to increase your federal or state withholding percentage. This way more money is set aside each week, and you are less likely to owe at tax time.

What happens if too much tax was withheld

If more tax was withheld than you actually owe, you will receive a refund when you file your return. The refund comes from the federal government (for federal tax overpayment) or your state (for state tax overpayment), depending on which tax was over-withheld.

Refunds typically arrive within two to three weeks of the IRS processing your return, though it can take longer during busy filing season. You can check the status of your federal refund on the IRS website using the "Where's My Refund" tool.

If you want to avoid over-withholding, you can request lower withholding or zero withholding through your state unemployment office. Keep in mind that if you choose zero withholding, you will owe the full tax amount at filing time, so only do this if you are prepared to pay.

Self-employment tax does not apply to unemployment

Unemployment benefits are not subject to self-employment tax (Social Security and Medicare tax). You only owe regular income tax on them. This is different from self-employment income, which carries both income tax and self-employment tax obligations.

If you are self-employed and also receiving unemployment, you report the unemployment on your tax return separately from your business income. The unemployment is taxed as regular income; your business income is taxed as regular income plus self-employment tax.

Frequently Asked Questions

Can I request zero federal tax withholding on my unemployment?

Yes. Contact your state unemployment office or log into your online account and change your withholding election to zero. You will then receive the full benefit amount each week, but you will owe the full federal tax when you file your return. This only makes sense if you have little or no other income and expect to owe little or no tax overall.

What if I worked part of the year and also received unemployment?

Both your wages and unemployment are added together to calculate your total income tax. Your employer withholds tax from your wages, and your state withholds tax from unemployment. When you file, the total withholding from both sources is compared to your total tax liability. You may owe more, owe nothing, or receive a refund depending on how much was withheld overall.

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

It depends on how much you received. The IRS sets a minimum income threshold each year below which you do not have to file. For 2024, if your only income was unemployment and it was below roughly $14,600, you may not have to file. However, filing anyway can be worthwhile if tax was withheld, because you may receive a refund. Check the IRS website for the current threshold.

Will receiving unemployment affect my tax bracket or refund?

Yes. Unemployment is added to your other income, which may push you into a higher tax bracket and increase your overall tax bill. It may also reduce refundable tax credits like the Earned Income Tax Credit. The exact impact depends on your total income and which credits you are may have access to to.

Can I change my tax withholding after I have already received benefits?

Yes, you can change your withholding at any time. However, the change only applies to future payments, not to payments you have already received. If you want to adjust for past underpayment, you can do so when you file your tax return or by making an estimated tax payment to the IRS.