Yes, unemployment benefits are taxable income, but you can choose whether to have taxes withheld from your payments
The federal government treats unemployment benefits as taxable income. That means the money you receive counts toward your total income for the year, and you may owe federal income tax on it. However, you have control over whether your state unemployment office withholds taxes automatically or whether you pay when you file your tax return.
Most people do not have to pay state income tax on unemployment benefits — your state may be one of them — but federal tax almost always applies. The amount you owe depends on your total income for the year, your filing status, and whether you have other income sources like wages, pensions, or investment earnings.
Key Takeaways
- Unemployment benefits are subject to federal income tax, and you report them on your tax return using Form 1099-G.
- You can request that your state withhold 10 percent of each payment for federal taxes, or you can pay the full amount when you file.
- Only a handful of states tax unemployment benefits as state income; most do not, so check your state's rules.
- If you have little other income, you may owe no federal tax even though benefits are technically taxable.
- Failing to report unemployment on your tax return can result in penalties and interest, even if you owe no tax.
How federal tax withholding works on unemployment
When you first file for unemployment, your state agency will ask whether you want federal income tax withheld from your weekly or biweekly payments. If you say yes, the state will hold back 10 percent of each benefit check and send it to the IRS on your behalf. This is purely voluntary — you can request withholding, decline it, or change your choice later.
The 10 percent withholding is a flat rate and does not adjust based on your actual tax bracket. For some people, 10 percent is more than enough to cover what they owe; for others, it is less. The withholding is straightforward a prepayment toward your tax bill, similar to the way an employer withholds from a paycheck.
To request or change withholding, contact your state unemployment office directly. Most states allow you to make this choice online, by phone, or by mail. If you did not request withholding when you filed, you can usually add it later — but the state will only withhold from payments going forward, not retroactively from money you already received.
What happens if you do not have taxes withheld
If you decline withholding, you are responsible for paying the tax when you file your annual return. This means you need to set aside money from your benefits or be prepared to pay a lump sum in April. Many people find this difficult because unemployment benefits are already tight, so withholding can feel like forced savings.
The risk of not withholding is underpayment penalties. If you owe more than $1,000 in federal tax for the year and did not have enough withheld or make estimated tax payments, the IRS will charge you interest and a penalty on top of the tax itself. The penalty is usually small — around 0.5 percent per month — but it adds up if you wait until April to pay.
Some people choose not to withhold because they expect their total tax bill to be zero or very small. This is a valid strategy if your unemployment is your only income and it falls below the standard deduction for your filing status. However, you still must file a return and report the benefits, even if you owe nothing.
State income tax on unemployment benefits
Most states do not tax unemployment benefits at all. However, a small number of states do treat unemployment as taxable state income. As of now, only a handful of states — including Illinois, Indiana, Mississippi, Missouri, Montana, New Jersey, and Vermont — tax unemployment benefits. Even in these states, the tax rate is usually lower than the rate on wages.
If you live in a state that taxes unemployment, you will see state tax withholding as a separate option from federal withholding. Some states allow you to request state withholding, while others do not. Check your state unemployment office website or call to find out whether your state taxes benefits and what your options are.
If your state does tax unemployment and you did not have state tax withheld, you will owe state income tax when you file your state return. The amount depends on your state's tax brackets and your total state income for the year.
Reporting unemployment on your tax return
Your state unemployment office will send you a Form 1099-G by January 31 of the following year. This form shows the total unemployment benefits you received and any federal tax that was withheld. You must report this information on your federal tax return, even if no tax was withheld.
On the federal return, unemployment benefits go on Form 1040, line 19 (or the equivalent line on whatever form you use). You add this amount to your other income to calculate your total taxable income. If you had federal tax withheld, that amount is reported on the same form and counts as a payment toward your total tax bill.
If you do not receive a Form 1099-G by early February, contact your state unemployment office. You need this form to file accurately, and the IRS will expect to see it. If you file without it and the IRS later receives the form from the state, you may face a mismatch notice and additional correspondence.
When unemployment benefits may not be taxable
Unemployment benefits are always taxable at the federal level, but your actual tax bill depends on your total income and filing status. If your unemployment is your only income and it falls below the standard deduction for your filing status, you will owe no federal income tax — even though the benefits are technically taxable.
The standard deduction varies by age and filing status. For 2024, the standard deduction is $14,600 for a single person under 65, $19,550 for a head of household, and $29,200 for a married couple filing jointly. If your unemployment benefits plus any other income fall below these amounts, you will owe no federal tax.
However, you must still file a return and report the unemployment benefits. Filing even when you owe no tax can be important because it may allow you to claim refundable tax credits like the Earned Income Tax Credit (EITC) or the Child Tax Credit, which can result in a refund even if no tax is owed.
What to do if you owe more tax than was withheld
If you had 10 percent withheld but your actual tax bill is higher — because you have other income or because your tax bracket is higher than 10 percent — you will owe the difference when you file. You can pay this amount with your return, set up a payment plan with the IRS, or request an extension if you need more time.
To avoid this situation in the future, you can request additional withholding from your unemployment benefits. Contact your state unemployment office and ask to increase the withholding rate. Some states allow you to withhold more than 10 percent, though others cap it at 10 percent.
Another option is to make estimated tax payments directly to the IRS if you expect to owe a large amount. This spreads the payments across the year rather than requiring a lump sum in April. The IRS website has a worksheet to help you calculate estimated payments.
Frequently Asked Questions
Do I have to pay taxes on unemployment if I did not work?
Yes. Unemployment benefits are taxable income regardless of whether you worked before or how long you worked. The tax applies to the benefits themselves, not to your prior work history. You report the benefits on your tax return and pay tax based on your total income for the year.
What if I received unemployment in one state but moved to another?
You report all unemployment benefits you received during the year on your federal return, regardless of which state paid them. For state taxes, you follow the rules of the state where you lived when you received the benefits. If you moved mid-year, you may need to file returns in both states.
Can I change my withholding choice after I stop receiving benefits?
No. Withholding changes only explore to future payments. If you did not request withholding while you were receiving benefits, you cannot go back and have taxes withheld retroactively. You will report all benefits on your tax return and pay any tax owed at that time.
What happens if I file my tax return and do not report unemployment benefits?
The IRS will eventually match your return against the Form 1099-G your state sent them. If the amounts do not match, you will receive a notice asking you to explain the difference. You will then owe the tax plus interest and penalties. It is always better to report the benefits upfront.
Does the $600 unemployment bonus count as taxable income?
Yes. Any pandemic-related unemployment bonuses or supplemental payments are taxable income and must be reported on your tax return. These are treated the same way as regular unemployment benefits for tax purposes.