Unemployment benefits are taxable income

Yes, you owe federal income tax on unemployment benefits. The IRS treats unemployment as ordinary income, the same way it treats wages from a job. You do not pay Social Security or Medicare taxes (FICA) on unemployment, but you do pay federal income tax, and depending on where you live, you may owe state income tax as well.

This surprises many people because the money arrives when they are already struggling financially. But the tax obligation is real, and ignoring it can lead to penalties and interest when you file your return or when the IRS catches up with you later.

Key Takeaways

  • Unemployment benefits count as taxable income for federal tax purposes, even though you did not earn them through work.
  • You can have taxes withheld from your unemployment check when you first claim benefits, which prevents a large bill at tax time.
  • If you do not withhold taxes, you may owe a lump sum when you file your return, plus penalties if you owed more than $1,000.
  • Some states do not tax unemployment, but most do, so check your state's rules before assuming you owe nothing.
  • The IRS sends Form 1099-G in January or February showing how much unemployment you received, which you must report on your tax return.

How much tax you owe depends on your total income

The tax you owe on unemployment is not a flat percentage. Instead, it depends on your total income for the year — unemployment plus any wages, interest, or other income you had. The more income you have, the higher your tax rate.

If unemployment was your only income for the year and it was modest, you might owe little or nothing. But if you worked part of the year and also collected unemployment, or if you have a spouse with income, your tax bill can be substantial. You cannot know what you owe until you add up everything and calculate your tax liability.

This is why withholding taxes during the year is so useful: it spreads the tax burden across your unemployment checks instead of hitting you with a bill in April.

Withholding taxes from your unemployment check

When you first file for unemployment, you have the option to have federal income tax withheld from your benefits. The standard withholding rate is 10 percent of each check. If you choose this option, the state unemployment office deducts the tax before sending you the money.

To set up withholding, you typically fill out a form when you claim benefits — often called a tax withholding election or similar. The exact name and process varies by state. Some states let you change your withholding choice later through your online account or by calling the unemployment office.

Withholding 10 percent is not always enough to cover what you will owe, especially if you have other income. But it is better than withholding nothing, and you can adjust it if you know your situation will result in a higher tax bill.

What happens if you do not withhold taxes

If you do not have taxes withheld from your unemployment checks, you will owe the full amount when you file your tax return. Depending on how much you received, this can be hundreds or thousands of dollars due all at once.

If you owe more than $1,000 in federal income tax for the year and did not have enough withheld or make estimated tax payments, you may also owe a penalty for underpayment. This penalty is in addition to the tax itself and any interest the IRS charges.

Some people set aside money from each unemployment check to cover the tax bill, which works if you have the discipline to do it. But most people find it easier to have the tax withheld automatically so the money is already gone and they do not face a surprise bill.

State unemployment taxes vary widely

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

Some states automatically withhold state tax from your unemployment check, while others do not. Check your state's unemployment office website or call them to find out whether state tax is withheld and whether you need to take any action.

If your state taxes unemployment but does not withhold automatically, you will owe the state tax when you file your state return. This is separate from your federal tax bill.

The Form 1099-G and your tax return

In January or February after the year ends, the state unemployment office sends you a Form 1099-G. This form shows how much unemployment you received in the previous year, broken down by quarter. You must report this amount on your federal tax return, even if no taxes were withheld.

The IRS also receives a copy of your 1099-G, so they know how much unemployment you got. If you do not report it on your return, the IRS will notice the discrepancy and may contact you.

Keep your 1099-G with your tax records. If you file electronically, your tax software will prompt you to enter the information from the form. If you file on paper, you attach a copy of the 1099-G to your return.

What to do if you cannot pay your tax bill

If you owe taxes on unemployment and cannot pay the full amount when you file, you have options. You can request a payment plan from the IRS, which lets you pay over time in monthly installments. You can also request an offer in compromise if your financial situation is dire, though the IRS rarely accepts these.

Do not ignore a tax bill. If you cannot pay, file your return anyway and contact the IRS about a payment arrangement. Penalties and interest grow quickly if you do not pay, and the IRS can eventually garnish your wages or seize your bank account.

If you are struggling financially, a tax professional or a free tax clinic in your area can help you understand your options and file your return correctly.

Frequently Asked Questions

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

Yes. If you had more tax withheld than you actually owe, you will receive a refund when you file your return. This happens when unemployment was your only income and the 10 percent withholding rate was more than your actual tax liability. The refund comes from the IRS, not from the unemployment office.

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

It depends on how much you received and your age and filing status. For 2023, a single person under 65 generally must file if their income was $13,850 or more. However, filing even when you are not required can be worthwhile if taxes were withheld, because you may be due a refund. Check the IRS website or use their interactive tool to determine whether you must file.

What if I moved to a different state after collecting unemployment?

You still owe taxes to the state where you received the unemployment benefits, not necessarily where you live now. However, some states have agreements to avoid double taxation. File your return in the state that issued your 1099-G, and if you also owe taxes to your new state, that state's return will account for taxes already paid elsewhere.

Is there a way to avoid paying taxes on unemployment?

No. Unemployment is taxable income under federal law, and you cannot avoid the tax by not reporting it or by not filing a return. The only way to reduce your tax bill is to have legitimate deductions or credits that lower your overall tax liability, which a tax professional can help you explore.

What if the 1099-G shows the wrong amount?

Contact your state unemployment office when ready and ask them to issue a corrected 1099-G. Keep records of your unemployment payments so you can verify the amount. If the error is not corrected before tax time, file your return with the correct amount and include a note explaining the discrepancy. The IRS can cross-reference your records with the state's.