Unemployment benefits are taxable income, and you owe federal income tax on the full amount you receive

The Internal Revenue Service treats unemployment compensation as ordinary income. This means you must report every dollar you receive on your federal tax return, whether you collected $500 or $5,000. The state or federal agency that paid you will send you a Form 1099-G in January showing the total amount, and that figure goes on your tax return.

You do not have to pay Social Security or Medicare taxes (FICA taxes) on unemployment, but federal income tax applies. Some states also tax unemployment benefits, though the rules vary by state. The amount of tax you owe depends on your total income for the year and your tax bracket, not on the unemployment amount alone.

Key Takeaways

  • You must report all unemployment benefits as income on your federal tax return, reported on Form 1099-G sent by the paying agency.
  • Federal income tax applies to the full amount, but Social Security and Medicare taxes do not.
  • Some states tax unemployment benefits and some do not; your state tax return instructions will specify whether yours does.
  • You can have taxes withheld from your unemployment payments when you first file, or pay estimated taxes quarterly, or settle the full amount when you file your return.
  • If you did not have taxes withheld and owe a large amount, the IRS allows payment plans and may waive penalties if you can show reasonable cause.

How the IRS counts unemployment on your tax return

Unemployment benefits appear on line 19 of Form 1040 (the main federal income tax form). You enter the full amount from your Form 1099-G, then subtract any federal income tax you already had withheld during the year. The remaining taxable unemployment income combines with your other income — wages, interest, self-employment earnings — to determine your tax bracket and total tax bill.

If you had other income during the year, unemployment can push you into a higher tax bracket. For example, if you earned $30,000 in wages and then received $8,000 in unemployment, the IRS treats you as having $38,000 in income for the year. This matters because tax brackets are progressive: each additional dollar of income is taxed at a higher rate once you cross certain thresholds.

You report this on your return whether you file Form 1040, Form 1040-SR (for people 65 and older), or Form 1040-NR (if you are a nonresident alien). The form and instructions are free from IRS.gov.

Withholding taxes from your unemployment payments

When you first file for unemployment, most states and the federal government offer you the option to have federal income tax withheld from your weekly or biweekly payment. The standard withholding rate is 10 percent of each payment. If you choose this option, the agency deducts that amount before sending you the rest and reports it as tax paid on your Form 1099-G.

Withholding at 10 percent does not may provide you will owe nothing at tax time — it depends on your total income and tax situation. But it reduces the amount you owe or increases your refund. You can change your withholding election at any time by contacting your state unemployment office or logging into your account on their website.

If you did not elect withholding when you filed and now realize you should have, you cannot go back and add it retroactively. You would instead need to pay estimated taxes or settle the full amount when you file your return.

State income tax on unemployment benefits

Nine states do not tax unemployment benefits at all: Alaska, Florida, Illinois, Mississippi, Missouri, Nevada, New Hampshire, South Dakota, Tennessee, and Wyoming. In these states, you owe federal income tax but no state income tax on the money.

All other states tax unemployment as income. Some allow you to have state tax withheld alongside federal withholding; others do not. Your state unemployment office website or the instructions with your Form 1099-G will show whether withholding is available and how to request it.

If your state taxes unemployment and you did not have state tax withheld, you will owe state income tax when you file your state return. The amount depends on your state's tax brackets and rates, which vary widely. Some states tax unemployment at the same rate as wages; others have different rules.

What happens if you owe taxes at filing time

If you did not have taxes withheld and owe money when you file your return, you pay it along with your return. You can pay by credit card, debit card, electronic bank transfer, or check. The IRS website (IRS.gov) shows all payment methods.

If you cannot pay the full amount, you can set up a payment plan. The IRS offers short-term plans (up to 180 days) at no cost and long-term installment agreements that charge a setup fee and interest. You can request a plan online through IRS.gov, by phone at 1-800-829-1040, or by mail.

If you owe a large amount and did not have taxes withheld because you did not know you had to, or because the unemployment office did not clearly explain the option, you may be able to request penalty relief. The IRS considers requests for reasonable cause on a case-by-case basis. You would need to explain your situation in writing and include supporting documents.

Estimated tax payments if you are self-employed or have other income

If you received unemployment and also had self-employment income, rental income, or investment income during the year, you may owe estimated taxes. Estimated taxes are quarterly payments you make to the IRS in April, June, September, and January to cover income tax on money that is not subject to withholding.

You calculate estimated taxes using Form 1040-ES, which the IRS provides free on IRS.gov. The form includes a worksheet to help you figure out whether you need to make quarterly payments and how much. If you underpay estimated taxes, you may owe a penalty when you file your return, though the IRS waives the penalty in certain situations (such as if your income was uneven throughout the year).

If you are unsure whether you need to make estimated payments, a tax professional or the IRS Free File program can help. The IRS Free File program is available to people whose income is below a certain threshold (the threshold changes yearly) and includes free tax software and sometimes free help from a tax professional.

How unemployment affects tax credits and deductions

Unemployment income counts toward your total income when determining whether you can claim certain tax credits. The Earned Income Tax Credit (EITC), for example, has income limits. If your unemployment pushes you over the limit, you lose the credit. The Child Tax Credit and other credits have similar rules.

Deductions work differently. The standard deduction (a flat amount you can subtract from income) does not change based on unemployment. If you itemize deductions instead, unemployment does not directly affect what you can deduct, but your total income may affect whether certain deductions are available.

When you file your return, tax software or a tax professional will calculate which credits and deductions you can claim based on your total income, including unemployment.

Frequently Asked Questions

Do I have to report unemployment if I only received a small amount?

Yes. The IRS requires you to report all unemployment income on your federal tax return, regardless of the amount. Even $100 in unemployment must be reported. If you received any unemployment during the year, your Form 1099-G will show it, and you must include it on your return.

What if I received unemployment in one year but did not file a tax return?

You should file a return to report the income. If you owe tax and do not file, the IRS can assess penalties and interest. If you are owed a refund, filing allows you to claim it, though you generally have three years from the original due date to claim a refund.

Can I deduct job search expenses or training costs from unemployment income?

No. Unemployment benefits are taxed as ordinary income with no special deductions tied to them. Job search expenses and training costs are generally not deductible on your personal tax return (though some education expenses may may have access to for education credits). A tax professional can review your specific situation.

If I received unemployment in 2020 and had it forgiven under the CARES Act, do I still owe tax on it?

The CARES Act allowed people to exclude up to $10,200 of unemployment received in 2020 from their taxable income if their modified adjusted gross income was below $150,000. If you received more than $10,200, the amount over that threshold is still taxable. The IRS provided instructions for amending returns filed before this rule was announced. Check IRS.gov for details specific to your situation.

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

You report unemployment on your federal return regardless of where you live now. For state taxes, you generally file in the state where you earned the income (where you received unemployment), not where you live now. However, some states have reciprocal agreements. Your new state's tax department website will explain the rules.