You can choose to have federal income tax withheld from your unemployment payments, but you are not required to

When you file for unemployment, you will be asked whether you want federal income tax withheld from your weekly or biweekly payment. This is optional. If you say no, you will receive the full amount but will owe taxes when you file your return. If you say yes, the state will hold back a percentage (usually 10 percent) and send it to the IRS on your behalf.

The choice depends on whether you expect to owe taxes at the end of the year and whether you prefer to pay gradually or in a lump sum. There is no penalty for choosing either way — it is purely about cash flow and tax planning.

Key Takeaways

  • Withholding is optional and you decide at the time you file for unemployment, though you can change your choice later.
  • If you do not withhold, you will owe the full tax bill when you file your return, which could be several hundred dollars depending on how long you received benefits.
  • Withholding at 10 percent is the standard federal rate, but it may not cover your full tax liability if unemployment is your only income or if you have other income sources.
  • You can change your withholding choice mid-year by contacting your state unemployment office, though the process and timing vary by state.

How withholding works and what the 10 percent rate means

When you withhold, the state holds back 10 percent of your unemployment payment before sending you the rest. That 10 percent goes to the IRS as a federal income tax payment. For example, if your weekly benefit is $400 and you choose withholding, you receive $360 and the state sends $40 to the IRS.

The 10 percent rate is a flat federal withholding rate set by law — it does not change based on your income level or tax bracket. It is meant to be a rough estimate, not a precise calculation of what you will actually owe. Whether 10 percent covers your full tax bill depends on your total income for the year and your filing status.

Some states also allow you to withhold state income tax at the same time, though this is less common and varies by location. Check with your state unemployment office to see whether state withholding is an option where you live.

When withholding makes sense

Withholding is useful if you want to avoid a large tax bill in April. If you received unemployment for several months, the total amount can be substantial — $10,000 or more — and the tax on that income could be $1,500 to $2,500 depending on your other income and filing status. Having 10 percent withheld spreads that cost across your benefit payments instead of requiring a lump-sum payment later.

Withholding also makes sense if you do not have other savings or income to cover a tax bill. If you are living paycheck to paycheck, losing $360 per week instead of $400 is easier to manage than owing $2,000 when you file your return.

If you have a spouse who works or you have other income sources, withholding becomes more important because your total household income will be higher and your tax bracket may be higher as well. In that case, 10 percent may not be enough, but it is still better than nothing.

When you might skip withholding

You might choose not to withhold if you expect your tax liability to be low or zero. This can happen if unemployment is your only income for the year and it falls below the standard deduction for your filing status. In 2024, the standard deduction is $14,600 for single filers and $29,200 for married filing jointly. If your total income is below that, you may owe no federal income tax at all.

Skipping withholding also makes sense if you have other income that will already cover your tax bill — for example, if you worked part of the year and your employer withheld taxes, or if you have investment income. In those cases, you can calculate whether you need additional withholding from unemployment or whether you are already on track.

Some people skip withholding because they need every dollar of their benefit payment to cover living expenses. This is a real choice, though it means you will need to set aside money or plan to pay taxes later. If you go this route, consider setting aside 10 to 15 percent of each payment yourself so the bill is not a shock.

How to change your withholding choice

You make your initial withholding choice when you file for unemployment. Most states allow you to change it later by contacting the unemployment office directly — usually by phone, mail, or through your online account. The change typically takes effect within one to two weeks, though this varies by state.

If you started without withholding and realize you need it, you can request it mid-year. If you started with withholding and want to stop, you can request that too. Keep in mind that changing your choice does not affect payments you have already received — it only applies to future payments.

Some states make this process easier than others. A few allow you to change withholding online through your account portal. Others require a phone call or a written request. Contact your state unemployment office to find out what method they use and how long the change takes to go into effect.

What happens if withholding is not enough

If you withhold 10 percent but still owe more tax when you file your return, you will pay the difference when you file. This can happen if your total income for the year is high enough that your tax bracket is higher than 10 percent, or if you have other income sources that push you into a higher bracket.

The IRS does not penalize you for underpaying through withholding — you simply owe the remaining balance. You can pay it with your return or set up a payment plan if you cannot pay in full. If you overpaid through withholding, you will receive a refund.

To avoid a large bill at tax time, you can estimate your total income for the year and calculate whether 10 percent will be enough. The IRS website has a withholding calculator that can help. If it looks like 10 percent will not cover your bill, you might want to request withholding if you have not already, or increase it if your state allows.

Reporting unemployment income on your tax return

Unemployment benefits are taxable income. You must report them on your federal tax return whether or not you had withholding. The state will send you a Form 1099-G in January or early February showing the total unemployment you received and any federal tax withheld.

You report the full unemployment amount on your return, and the IRS credits you for any withholding that was done. If you withheld $2,000 and owe $2,500 in tax, you pay $500. If you withheld $2,000 and owe $1,800, you receive a $200 refund.

Keep your Form 1099-G and any documentation of withholding with your tax records. If you filed for unemployment in more than one state, you will receive a separate 1099-G from each state.

Frequently Asked Questions

Can I change my withholding choice after I have already started receiving benefits?

Yes. Contact your state unemployment office and request a change. Most states allow this by phone, mail, or online account. The change usually takes effect within one to two weeks and applies only to future payments, not ones you have already received.

What if I did not withhold and now I owe a lot of taxes?

You will owe the amount when you file your return. You can pay it in full or set up a payment plan with the IRS if you cannot pay immediately. There is no penalty for owing taxes as long as you pay by the deadline or arrange a plan before then.

Is 10 percent withholding always enough to cover my taxes?

Not necessarily. It depends on your total income for the year and your tax bracket. If unemployment is your only income and it is below the standard deduction, you may owe nothing. If you have other income or earned a lot in unemployment, you may owe more than 10 percent. Use the IRS withholding calculator to estimate.

Do I have to withhold state income tax too?

Some states allow you to withhold state income tax from unemployment benefits, but not all. Check with your state unemployment office to see whether this option is available where you live and what the rate is.

What if I withheld too much and am getting a refund?

The IRS will refund the overpayment when you file your return. You can receive it as a refund check, have it deposited to your bank account, or apply it to next year's taxes. There is no penalty for overpaying.