How Much Is Unemployment Taxed in NY?
Understand how unemployment benefits are taxed in New York, including state and federal rates, withholding options, and potential tax credits.
Unemployment benefits provide financial support but are considered taxable income. Failing to account for taxes on these payments can lead to an unexpected bill at tax time. Understanding how unemployment is taxed in New York helps recipients plan ahead and avoid surprises when filing their returns.
Applicable State Tax Rate
New York includes unemployment benefits as taxable income, with state tax rates ranging from 4% to 10.9% in 2024. The rate depends on total taxable income. For instance, a single filer earning under $8,500 is taxed at 4%, while those making over $25 million pay 10.9%. Most unemployment recipients fall within the 4% to 6.85% range.
New York City and Yonkers impose additional local income taxes. NYC’s tax rate reaches up to 3.876%, while Yonkers adds up to 1.959%. These local taxes increase the total owed on unemployment benefits.
Unlike wages, unemployment benefits do not have automatic state tax withholding. Recipients must make estimated payments or request voluntary withholding to avoid a large tax bill. Form IT-2104.3 allows recipients to have state taxes deducted from benefits.
Federal Taxation Differences
The IRS taxes unemployment benefits as regular income, with federal tax rates in 2024 ranging from 10% to 37%. These benefits do not qualify for exclusions or deductions.
Recipients can request federal tax withholding at a flat 10% rate using Form W-4V. If no withholding is chosen and total tax liability exceeds $1,000, estimated quarterly payments may be required using Form 1040-ES. Underpayment penalties apply if taxes are not paid throughout the year.
Unemployment benefits can affect eligibility for certain tax credits. The Earned Income Tax Credit (EITC) does not count unemployment compensation as earned income, which may disqualify some recipients. Additionally, benefits impact the Premium Tax Credit for health insurance subsidies, as total household income determines eligibility.
Withholding Choices
Since unemployment benefits lack automatic withholdings, recipients must manage their tax obligations. One option is to request a 10% federal withholding by submitting Form W-4V to the New York State Department of Labor. While this does not cover state taxes, it reduces the federal tax burden.
Alternatively, estimated tax payments can be made quarterly. The IRS requires these payments if total tax liability after credits and withholdings exceeds $1,000. Payments are due in April, June, September, and January. New York follows a similar schedule for state taxes. Failing to make timely payments can result in penalties.
Reporting Steps on Returns
Unemployment compensation is reported using Form 1099-G, issued by the New York State Department of Labor by January 31. This form lists total benefits received and any taxes withheld. The amount in Box 1 is entered on Schedule 1 (Form 1040), Line 7, then carried over to Line 8 of Form 1040. For New York State returns, this income is reported on Form IT-201, Line 14.
If the 1099-G contains errors, recipients should contact the issuing agency for corrections before filing. Reporting incorrect amounts can lead to underpayment penalties, typically 20% of the understated tax liability under Internal Revenue Code 6662.
If benefits were overpaid due to errors or fraud, New York may require repayment. If repayments were made in the same year, the corrected amount should be reported. If repaid in a later year and exceeding $3,000, taxpayers may qualify for a deduction or credit under Internal Revenue Code 1341.
Potential Credits and Exemptions
Certain credits and deductions can help offset the tax burden of unemployment benefits. Eligibility depends on income, filing status, and other financial factors.
Earned Income Tax Credit (EITC)
Unemployment compensation does not count as earned income for the EITC. However, individuals who worked earlier in the year may still qualify. The maximum credit in 2024 is $7,830 for families with three or more children. If a taxpayer’s total income is lower than usual due to job loss, they may be eligible for a larger credit than in previous years. Those relying solely on unemployment benefits, however, do not meet the earned income requirement.
Unemployment Repayment Deduction
If recipients were required to repay unemployment benefits due to an overpayment, they may be able to deduct the repaid amount. For repayments under $3,000, the deduction is taken as an adjustment to income on Schedule 1 (Form 1040). If the repayment exceeds $3,000, taxpayers can choose between deducting it as an itemized deduction or claiming a credit under the claim of right doctrine (Internal Revenue Code 1341). This can help reduce tax liability, particularly for those who had taxes withheld from benefits but later had to return the funds.