Is Unemployment Income Taxable in PA?

In Pennsylvania, unemployment compensation is subject to federal income tax but is not taxed at the state or local levels. This treatment requires recipients to understand their obligations to both the federal and state governments. Managing these tax responsibilities is an important part of handling your finances while out of work.

Taxability at Different Government Levels

Federal Income Tax

The Internal Revenue Service (IRS) considers all unemployment benefits to be income, which must be reported on your federal tax return. This compensation is subject to your ordinary income tax rate. Any special federal exclusions on unemployment income, such as the one available for the 2020 tax year, have expired, meaning all benefits are fully taxable at the federal level.

Pennsylvania State Income Tax

Pennsylvania is one of the few states that does not levy a tax on unemployment compensation. This means you are not required to include these benefits as income on your Pennsylvania state income tax return.

Receiving and Understanding Your Tax Form

Each year, the Pennsylvania Department of Labor & Industry issues Form 1099-G, Certain Government Payments, to anyone who received unemployment compensation. This form details the total benefits paid to you during the year in Box 1 and shows any federal income tax withheld in Box 4. The Department makes Form 1099-G available electronically through the online unemployment dashboard, and you can also request a paper copy be sent by mail.

Managing Your Tax Liability

Voluntary Tax Withholding

To avoid a large tax bill, you can choose to have federal income tax withheld directly from your unemployment payments. You can elect to have a flat 10% of your benefits withheld for federal taxes by completing Form W-4V, Voluntary Withholding Request. This request can be submitted through your online unemployment account. Since Pennsylvania does not tax these benefits, there is no option for state tax withholding.

Making Estimated Tax Payments

As an alternative to withholding, you can make quarterly estimated tax payments. This method involves calculating your expected tax liability for the year and paying it in four installments to the IRS for your federal obligation.

Reporting Unemployment on Your Tax Returns

Federal Return

When filing your federal return, the total unemployment compensation from Box 1 of your Form 1099-G is entered on Schedule 1 of Form 1040. Any federal income tax withheld from your benefits, found in Box 4 of your 1099-G, is reported on the main Form 1040.

Pennsylvania State Return

Because Pennsylvania does not tax unemployment income, you should not report these benefits on your state tax return, the PA-40. The income is exempt from state-level taxation and is excluded from your state income calculation.