How Much Tax Do You Pay on Unemployment?

Unemployment benefits provide temporary financial assistance to eligible individuals. Understanding how these benefits are taxed at both federal and state levels is important for accurate tax filing.

Federal Taxation of Unemployment Benefits

Unemployment benefits are considered taxable income at the federal level. The Internal Revenue Service (IRS) treats these payments similarly to wages. This applies to various forms of unemployment compensation, including benefits paid by state or federal agencies, Railroad Unemployment Insurance Act benefits, and disaster unemployment assistance.

The amount of federal tax paid on unemployment benefits depends on overall taxable income and tax bracket. Unlike regular wages, federal income taxes are not automatically withheld from unemployment benefits. Recipients are responsible for ensuring taxes are paid.

State Taxation of Unemployment Benefits

While unemployment benefits are taxable at the federal level, their taxability at the state level varies significantly. Some states fully tax unemployment benefits. Other states do not tax unemployment benefits at all.

A third category of states may have specific rules, such as partially exempting a fixed dollar amount or taxing them only above a certain income threshold. Individuals should consult their state’s Department of Labor or Revenue website for state-specific tax treatment.

Reporting Unemployment Income

Individuals who receive unemployment benefits typically receive Form 1099-G, “Certain Government Payments,” from their state unemployment agency. This form details the total amount of unemployment compensation paid to the recipient during the calendar year in Box 1. It also indicates any federal income tax that was withheld from these payments in Box 4.

The information from Form 1099-G is essential for accurately reporting unemployment income on a federal tax return. The total unemployment compensation from Box 1 of Form 1099-G is reported on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, specifically on Line 7. Any federal tax withheld, as shown in Box 4, is then reported on Line 25b of Form 1040 or Form 1040-SR.

Voluntary Withholding for Unemployment Benefits

To manage potential tax liabilities, individuals receiving unemployment benefits have the option to have federal income tax voluntarily withheld from their payments. This proactive step can help prevent a large tax bill or the need for estimated tax payments at the end of the tax year. The federal law allows for a flat 10% federal tax withholding from unemployment benefits.

This withholding option is typically offered when an individual initially applies for unemployment benefits. If not elected at that time, recipients can usually request to start withholding by completing Form W-4V, Voluntary Withholding Request, and submitting it to their state unemployment agency. Some state agencies may also have their own specific forms or online portals for managing withholding requests.