Does Illinois Tax Unemployment Benefits?
Understand the different tax treatments for unemployment benefits on your federal and Illinois returns to ensure accurate reporting and manage your obligations.
Navigating the tax rules for unemployment benefits can be confusing, as different rules apply at the state and federal levels. For residents of Illinois, understanding these distinct obligations is necessary for accurate tax filing and financial planning. This article will clarify the tax treatment of unemployment compensation for both Illinois and federal income tax purposes, ensuring recipients can properly manage their tax responsibilities.
Illinois State Tax on Unemployment
Unemployment benefits received by an Illinois resident are subject to the state’s income tax. The Illinois individual income tax system uses the federal Adjusted Gross Income (AGI) as the starting point for its calculations on Form IL-1040, the state’s individual income tax return. Since unemployment payments are included in the federal AGI, they automatically flow through to the Illinois tax base.
Illinois does not offer a specific subtraction modification to remove unemployment compensation from its taxable income. The amount of unemployment benefits you report on your federal return will also be part of the income taxed by Illinois at its flat income tax rate. There is no special form or line item to add this income back, as it is already embedded within the initial AGI figure used on Form IL-1040.
Federal Tax on Unemployment
The federal government considers unemployment compensation to be taxable income. This means that any benefits received from the Illinois Department of Employment Security (IDES) must be reported on your federal tax return. The taxability applies to traditional state unemployment benefits as well as any special unemployment compensation authorized by the federal government.
IDES will issue Form 1099-G, “Certain Government Payments,” to each individual who received unemployment benefits during the calendar year. This form details the total amount of compensation paid to you in Box 1. You should receive this form by mail or be able to access it electronically through your IDES online account by January 31 of the year following the year you received benefits.
The total amount shown on Form 1099-G must be included in your gross income for the year. It is combined with your other earnings and sources of income to determine your total federal tax liability.
Managing Potential Tax Payments
To avoid a large tax bill when you file, you can proactively pay federal taxes on your unemployment benefits throughout the year. One method is voluntary withholding. You can request that the paying agency withhold federal income tax by submitting Form W-4V, “Voluntary Withholding Request.” For unemployment compensation, the IRS permits a flat withholding rate of 10% of each payment.
Alternatively, you can make quarterly estimated tax payments directly to the IRS. This is done using Form 1040-ES, “Estimated Tax for Individuals.” This method is suitable if you did not elect to have taxes withheld or if you believe the 10% withholding will not be sufficient to cover your total tax liability. Properly estimating and paying throughout the year can help you avoid potential underpayment penalties from the IRS.
The payment due dates for 2025 are:
- April 15
- June 16
- September 15
- January 15 of the following year
How to Report Unemployment Income
When it is time to file your taxes, you will use the information from your Form 1099-G. For your federal return, the total unemployment compensation from Box 1 of the 1099-G is reported as “other income.” Specifically, this amount is entered on Line 7 of Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.”
Any federal income tax you had withheld from your benefits, which is shown in Box 4 of Form 1099-G, is reported on the main Form 1040 along with any taxes withheld from wages. This ensures you receive credit for the payments you have already made.
Because Illinois starts its tax calculation with your federal AGI, the unemployment income is already included. You simply carry over the federal AGI to your Form IL-1040, and the unemployment benefits will be taxed as part of your total Illinois income.