Unemployment benefits are taxable income at the federal level, and in most states at the state level too

The short answer: yes, you owe federal income tax on unemployment benefits. Most states tax them as well. The IRS treats unemployment as ordinary income, which means it counts toward your total taxable income for the year and is subject to federal tax rates.

You do not have to pay Social Security or Medicare tax (FICA) on unemployment. But the federal government and most state governments will tax what you receive. The amount you owe depends on your total income for the year, your filing status, and whether you live in one of the few states that do not tax unemployment.

The key difference from wages: your employer does not withhold taxes from unemployment checks automatically. You can ask the state to withhold federal tax, but most people do not, which means you may owe a lump sum when you file your return.

Key Takeaways

  • Federal tax applies to all unemployment benefits, and you calculate what you owe based on your total income for the year, not just the unemployment amount.
  • You can request federal tax withholding from your unemployment payments, but it is optional and most states do not do it unless you ask.
  • State tax on unemployment varies: most states tax it, but a handful do not, and rates depend on your state and your income level.
  • If no tax was withheld during the year, you may owe a large payment when you file your tax return, so setting aside money as you receive benefits can prevent a surprise bill.

How federal tax on unemployment works

The IRS counts unemployment as taxable income in the year you receive it. This means it gets added to any wages, self-employment income, investment income, or other money you earned that year. Your total income then determines your tax bracket and how much federal tax you owe.

If you received $10,000 in unemployment and earned $20,000 in wages, the IRS treats you as having $30,000 in income for tax purposes. You pay federal tax on the full $30,000 based on your filing status and the tax brackets for that year.

You can request that your state withhold federal income tax from each unemployment payment. When you file your claim or during your weekly certification, you should see an option to elect federal withholding. If you choose this, the state will send a portion of each payment to the IRS on your behalf, reducing what you owe at tax time. The withholding rate is typically 10 percent of your benefit amount.

State taxes on unemployment benefits

Most states tax unemployment benefits as income, but the rules vary. Some states use the same tax rate as they do for wages. Others have a flat rate for unemployment. A few states do not tax unemployment at all.

States that do not tax unemployment include Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in any of these states, you owe no state income tax on your benefits, though you still owe federal tax.

In states that do tax unemployment, you can usually request state withholding the same way you request federal withholding. Some states make this automatic; others require you to opt in. Check your state's unemployment office website or your weekly certification screen to see whether withholding is available and how to set it up.

What happens if no tax was withheld

If you did not request withholding and your state did not withhold automatically, you will owe the full amount of tax when you file your return. This can be a large bill if you received several months of benefits.

For example, if you received $15,000 in unemployment over six months and earned no other income, you might owe $1,500 to $2,250 in federal tax alone, depending on your filing status. Add state tax if your state taxes unemployment, and the bill grows larger. Many people are surprised by this amount because they are used to taxes being taken out of paychecks automatically.

The best approach is to set aside money from each unemployment payment to cover taxes, or to request withholding so the money is taken out as you receive benefits. This spreads the tax burden across the year instead of creating a large bill in April.

How to calculate what you might owe

You cannot know exactly what you owe until you file your return and see your total income for the year. But you can estimate it.

Add up all unemployment received plus any other income (wages, self-employment, interest, dividends, rental income). Use the IRS tax tables or a tax calculator to find the tax on that total. Subtract any tax that was already withheld. The difference is what you owe or what you will receive as a refund.

If you are unsure whether you will owe, the IRS Free File program offers free tax software to people below a certain income threshold. The IRS website also has a tax withholding estimator that walks you through the calculation. These tools are free and do not require you to pay for tax software.

Special rules for 2020 unemployment benefits

In 2020 and 2021, the federal government provided extra unemployment payments due to the pandemic. For 2020, the IRS initially allowed people to exclude up to $10,200 of unemployment from taxable income if their modified adjusted gross income was below $150,000. This was a one-time break that applied only to 2020 benefits.

If you received pandemic unemployment in 2020 and already filed your return without claiming this exclusion, you could file an amended return to claim it. The important date to amend a 2020 return was generally three years from the original filing date. For 2021 and later years, no such exclusion exists, and all unemployment is taxable.

Reporting unemployment on your tax return

Unemployment benefits are reported on Form 1040, the main federal income tax return. Your state will send you a Form 1099-G in January or February showing the total unemployment you received in the previous year. You use this form to fill in the unemployment line on your return.

If you requested federal withholding, the amount withheld will also appear on the Form 1099-G. When you file, the tax software or tax preparer will use this information to calculate how much additional tax you owe or how much refund you will receive.

State returns work similarly. Your state will either send you a separate form or include unemployment information on a combined state and federal form. Check your state's tax office website to see what form you will receive and when.

Frequently Asked Questions

Do I have to pay Social Security and Medicare tax on unemployment?

No. Unemployment is not subject to FICA taxes (Social Security and Medicare). You only owe income tax — federal and state, depending on where you live.

Can I request tax withholding after I have already received benefits?

No, withholding applies only to future payments. If you did not request it while receiving benefits, you will owe the tax when you file your return. You can set aside money now to prepare for that bill.

What if I did not receive a Form 1099-G?

Contact your state unemployment office. The form is usually mailed in January or February, but if you do not receive it by early March, call or check the state's website to request a copy or view your benefit information online. You need this form to file your return accurately.

Will unemployment affect my tax refund?

Yes, if unemployment pushes your total income into a higher tax bracket or reduces credits you were counting on. The more income you have, the more tax you owe, which can reduce or eliminate a refund. Use a tax calculator to estimate your refund after including unemployment income.

Do I owe taxes on unemployment if I did not work?

Yes. Unemployment is taxable income regardless of whether you had other income that year. If unemployment was your only income, you still owe federal tax on it, and state tax if your state taxes unemployment.