How Much Tax Do You Pay on Unemployment in California?
Learn how unemployment benefits are taxed federally but not by California. Get clear guidance on reporting and managing your tax responsibilities.
Unemployment benefits provide temporary financial support to individuals who have lost their jobs. Understanding the tax implications of these benefits is important for recipients. Both federal and state tax rules apply to unemployment income, so awareness of their tax treatment helps individuals plan and fulfill their tax obligations.
Federal Taxability of Unemployment Benefits
Unemployment benefits are fully taxable at the federal level. All compensation from unemployment programs must be included as gross income for federal income tax purposes. The Internal Revenue Service (IRS) considers these benefits a form of income, similar to wages.
The amount of federal income tax owed depends on an individual’s overall taxable income and tax bracket. Unlike regular wages, federal income taxes are not automatically withheld from unemployment payments. Recipients are responsible for accounting for these taxes, either through voluntary withholding or by making estimated tax payments.
California State Tax Treatment of Unemployment Benefits
California’s approach to unemployment benefit taxation differs from the federal government. The state does not tax unemployment benefits. While individuals must report unemployment income on federal tax returns, it is not taxable income when filing California state tax returns.
This exemption applies to all types of unemployment compensation issued by the California Employment Development Department (EDD), including Unemployment Insurance (UI) benefits, Pandemic Unemployment Assistance (PUA) benefits, and Paid Family Leave (PFL) benefits.
Reporting Unemployment Income
Recipients of unemployment benefits receive Form 1099-G, “Certain Government Payments,” from their state’s unemployment agency, such as the California EDD. This form details the total unemployment compensation paid during the calendar year in Box 1 and any federal income tax withheld in Box 4.
Form 1099-G is essential for accurately preparing and filing federal income tax returns. The total unemployment compensation reported in Box 1 must be included on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, and then carried over to Form 1040. Most state unemployment offices make this form available online or mail it by January 31 of the year following benefits’ receipt.
Managing Your Tax Liability
To manage federal tax liability on unemployment benefits, individuals have two primary options for paying taxes throughout the year. One method involves requesting federal income tax be withheld directly from unemployment payments. This can be done by completing IRS Form W-4V, Voluntary Withholding Request, and submitting it to the state unemployment agency. For unemployment compensation, the permitted withholding rate is a flat 10% of each payment.
Alternatively, individuals can make estimated tax payments to the IRS throughout the year. This approach is particularly relevant for those who did not opt for withholding or have other sources of income not subject to withholding. Estimated taxes are typically paid quarterly using Form 1040-ES, Estimated Tax for Individuals, to help cover tax obligations and avoid underpayment penalties at tax time.