Do You Have to Pay Taxes on Pandemic Unemployment Benefits?

Unemployment benefits provided during the pandemic offered financial relief, but many recipients may not have considered the tax implications. These payments were taxable income in most cases, leading to unexpected liabilities when filing taxes.

Federal Tax Liability

Pandemic unemployment benefits were subject to federal income tax, just like regular unemployment compensation. The IRS classified these payments as taxable income, meaning they had to be reported on tax returns. This included benefits from programs such as Pandemic Unemployment Assistance (PUA) and Federal Pandemic Unemployment Compensation (FPUC). While not considered earned income, they were still included in total taxable income for the year.

The tax rate applied to these benefits depended on total income and filing status. Unemployment benefits were taxed at the same rate as wages under the IRS’s progressive tax system, which in 2024 ranged from 10% to 37%. If these benefits increased total income, they could push recipients into a higher tax bracket. Unlike wages, where taxes are withheld automatically, unemployment benefits required recipients to opt in for voluntary withholding, which many did not do.

State Tax Implications

Tax treatment of pandemic unemployment benefits varied by state. Some states followed federal tax rules and taxed unemployment payments, while others provided exemptions or temporary relief.

California, New Jersey, Pennsylvania, and Virginia did not tax these benefits, easing the burden on residents. In contrast, states like New York and Illinois treated them as taxable income. Some states, such as Delaware and Arkansas, initially taxed the benefits but later introduced exemptions or deductions.

In states with progressive income tax systems, unemployment benefits could push individuals into a higher tax bracket. For example, Minnesota’s tax brackets in 2024 ranged from 5.35% to 9.85%, meaning additional income could increase the tax rate on a portion of earnings. States with flat tax rates, such as Michigan at 4.05% and Colorado at 4.40%, applied the same rate regardless of income.

Reporting Pandemic Unemployment

Recipients had to report pandemic unemployment benefits on federal and, in many cases, state tax returns. The IRS issued Form 1099-G, detailing the total amount received. This form was critical for accurate reporting, as the IRS also received a copy and could flag discrepancies. Taxpayers who misplaced this form had to access it through their state’s unemployment office.

Errors on Form 1099-G were common, particularly with identity theft cases where fraudulent claims were filed. If the reported amount was incorrect, taxpayers had to contact the issuing agency for a corrected form. Failing to report the proper amount could result in IRS notices, additional taxes owed, or penalties.

Some states required additional documentation for unemployment income. States with earned income tax credits (EITC) often required separate income verification, as unemployment benefits were not considered earned income for credit eligibility. Misreporting could affect eligibility for tax credits or deductions, leading to adjustments in refunds or balances due.

Withholding and Estimated Payments

Managing tax obligations on pandemic unemployment benefits required planning, especially for those who did not have taxes withheld. Recipients could request voluntary withholding at a flat 10% rate using Form W-4V, but many opted out to maximize immediate financial relief, leading to unexpected tax liabilities.

For those who did not withhold taxes, making estimated payments was the alternative to avoid underpayment penalties. The IRS requires estimated tax payments if a taxpayer expects to owe at least $1,000 after withholding and credits. Quarterly deadlines typically fall on April 15, June 15, September 15, and January 15 of the following year. Failure to make sufficient estimated payments could result in penalties, calculated based on the IRS underpayment rate, which fluctuates quarterly (8% for Q1 2024).

Consequences of Non-Payment

Failing to pay taxes on pandemic unemployment benefits could lead to penalties, interest charges, and enforcement actions. The IRS and state tax agencies have mechanisms to collect unpaid taxes, and ignoring these obligations can escalate the situation.

The IRS imposes late payment penalties of 0.5% per month on unpaid taxes, up to a maximum of 25%. Additionally, interest accrues daily on the outstanding balance at a rate determined quarterly (8% for Q1 2024). If taxes remain unpaid for an extended period, the IRS may issue a Notice of Federal Tax Lien, which can negatively impact credit scores. In more severe cases, the agency can initiate wage garnishments or levy bank accounts.

State tax agencies also have enforcement measures, which may include withholding state refunds, suspending professional licenses, or imposing additional penalties. Some states charge higher interest rates on unpaid taxes than the IRS, making delays more costly. Taxpayers unable to pay in full may qualify for installment agreements through the IRS or their state revenue department.