Unemployment benefits are taxable income

Yes, you owe federal income tax on unemployment benefits. The federal government treats unemployment as ordinary income, the same way it treats wages from a job. You do not pay Social Security or Medicare tax (the 6.2% and 1.45% that come out of paychecks), but you do owe federal income tax at your regular rate.

Most states also tax unemployment benefits as state income, though a few do not. The states that do not tax unemployment are Alaska, Florida, Illinois, Mississippi, Missouri, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in any other state, you will owe state income tax on what you receive.

The amount you owe depends on your total income for the year, your filing status, and whether you have other income sources. If unemployment is your only income and it falls below the standard deduction for your filing status, you may not owe any tax at all — but you still have to file to find out.

Key Takeaways

  • Federal income tax applies to all unemployment benefits, but you do not pay Social Security or Medicare tax on them.
  • Twelve states do not tax unemployment benefits at the state level, but most states do.
  • The amount of tax you owe depends on your total income for the year and your filing status.
  • You can have taxes withheld from your unemployment payments when you file your claim, or pay the tax when you file your return.
  • If you do not withhold taxes and owe more than $1,000 when you file, you may face a penalty for underpayment.

How to handle taxes while receiving unemployment

When you file your unemployment claim, you will be asked whether you want federal income tax withheld from your payments. If you choose to withhold, the state will deduct 10% of each weekly benefit and send it to the IRS on your behalf. This is the simplest route because the money goes directly to your tax bill and you do not have to pay a lump sum later.

If you do not withhold taxes during the year, you will owe the full amount when you file your tax return. This works if your unemployment was low, if you had other income that already covered your tax liability, or if you prefer to handle everything at tax time. However, if you end up owing more than $1,000, the IRS may charge you an underpayment penalty.

You cannot choose to withhold state income tax the same way you withhold federal tax. Instead, you handle state tax when you file your state return. Some people withhold federal but not state, or vice versa, depending on their situation.

What counts as unemployment income for tax purposes

Regular unemployment insurance benefits are fully taxable. This includes payments from your state's unemployment insurance program, federal Pandemic Unemployment Compensation (which ended in 2021), and extended benefits.

Supplemental unemployment benefits from your employer — sometimes called SUB pay — are also taxable. These are payments your employer makes to you while you are laid off, separate from state unemployment.

Certain types of unemployment-related payments are not taxable. These include workers' compensation (which is for injury or illness on the job), Supplemental Security Income (SSI), and Social Security Disability Insurance (SSDI). If you received any of these instead of or alongside unemployment, only the unemployment portion is taxable.

Reporting unemployment on your tax return

When you file your federal return, you report unemployment benefits on line 19b of Form 1040. The state will send you a Form 1099-G in January or February showing how much you received and how much federal tax was withheld. You use this form to fill in your return.

If you did not receive a Form 1099-G by early February, contact your state unemployment office. You can file your return without it if you have to, but you need the exact amount to report correctly.

For your state return, the process varies by state. Some states use a similar form; others ask you to report it differently. Your state tax agency website will have instructions for your specific state.

When unemployment pushes you into a higher tax bracket

If you had a job for part of the year and then received unemployment for the rest, your total income for the year might be higher than usual. This can push you into a higher tax bracket, meaning you owe a higher percentage on all your income.

For example, if you earned $40,000 from your job and then received $15,000 in unemployment, your taxable income for the year is $55,000. You pay tax on the full $55,000 at the rates that explore to that income level, not at the rates that applied when you were earning $40,000.

This is one reason to consider withholding taxes during the year. If you know your total income will be higher because of unemployment, withholding 10% as you go prevents a large bill in April.

Special rules for the 2020 and 2021 unemployment expansion

During the COVID-19 pandemic, the federal government added extra unemployment payments on top of state benefits. The first $10,200 of these federal payments was made tax-free for people whose modified adjusted gross income was under $150,000 in 2020. This applied only to 2020 unemployment, not 2021.

If you received pandemic unemployment in 2020 and your income was above $150,000, all of it was taxable. If your income was below $150,000, you could exclude the first $10,200 and pay tax only on the rest.

This rule has already passed. If you filed your 2020 return and did not claim this exclusion, you can file an amended return (Form 1040-X) to claim it now and get a refund.

Frequently Asked Questions

Do I have to file a tax return if unemployment is my only income?

It depends on the amount. If your unemployment was below the standard deduction for your filing status (roughly $13,850 for single filers in 2023, though this changes yearly), you do not have to file. However, if you had federal tax withheld, you should file to get a refund of that money.

What if I owe taxes but cannot pay the full amount?

Contact the IRS or your state tax agency. Both offer payment plans that let you pay over time. You can also request a short-term extension to pay within 180 days. The sooner you contact them, the fewer penalties and interest charges you will owe.

Can I claim unemployment benefits as a deduction?

No. Unemployment is income, not a deductible expense. You cannot reduce your taxable income by claiming unemployment as a loss or deduction.

What if I received unemployment from two different states?

Each state will send you a Form 1099-G for the benefits you received there. You report both on your federal return, and both are taxable. You may also owe tax to both states, depending on where you live and where you worked.

Does the 10% federal withholding cover all my taxes?

Not necessarily. The 10% withholding is a flat rate that works for some people but not others. If you have other income, dependents, or deductions, you might owe more or less than 10%. The only way to know is to calculate your full tax liability when you file your return.