Unemployment benefits are taxable income, and you may owe federal income tax on them

The money you receive from unemployment insurance is treated as income by the IRS. You do not pay Social Security or Medicare tax on it, but you will owe federal income tax on the full amount you receive. Some states also tax unemployment benefits, though many do not. The amount you owe depends on your total income for the year, your filing status, and whether you chose to have taxes withheld when you first claimed benefits.

This is different from other forms of information — for example, Supplemental Nutrition information Program (SNAP) benefits are not taxable. But unemployment insurance, because it replaces wages you would have earned, is treated the same way the IRS treats wages themselves.

Key Takeaways

  • You owe federal income tax on 100 percent of your unemployment benefits, even if you received only a small amount.
  • You can choose to have taxes withheld from each payment when you file your claim, which reduces what you owe at tax time but lowers your weekly payment.
  • If you did not have taxes withheld, you may owe a lump sum when you file your tax return, so setting money aside is important.
  • Some states tax unemployment benefits and some do not; your state's unemployment office can tell you whether your state is one that does.
  • You must report all unemployment income on your federal tax return, even if no one sends you a form.

Federal tax withholding: choosing to have taxes taken out now or later

When you file for unemployment benefits, you are given the option to have federal income tax withheld from your weekly or biweekly payment. This is voluntary — you do not have to choose it. If you do, the standard withholding rate is 10 percent of your benefit amount.

Choosing withholding means a smaller check each week, but it also means you will owe less (or nothing) when you file your tax return in April. If you do not choose withholding, you keep the full benefit amount each week, but you will need to pay the full tax bill when you file. Many people who do not withhold set aside 10 to 20 percent of each payment to cover what they will owe.

You can change your withholding choice at any time during your claim. If you realize partway through the year that you should have withheld, you can start. If you withheld too much, you will get a refund when you file your return.

State unemployment taxes: which states collect them

Thirteen states tax unemployment benefits: Alabama, Arkansas, Illinois, Indiana, Kansas, Louisiana, Mississippi, Missouri, Montana, New Jersey, New York, Pennsylvania, and Rhode Island. If you live in one of these states and received benefits, you owe state income tax on them in addition to federal tax.

The state tax rate varies by state and sometimes by income level. Some states allow you to have state tax withheld the same way you can with federal tax — usually at the time you file your claim. Others do not offer withholding and you will owe the tax when you file your state return. Contact your state's unemployment office or revenue department to find out whether your state taxes benefits and whether withholding is available.

Reporting unemployment income on your tax return

You will receive a Form 1099-G from your state's unemployment office by January 31 of the year after you received benefits. This form shows the total amount of unemployment benefits you received and any federal tax that was withheld. You must report this income on your federal tax return, even if you did not receive a Form 1099-G or if the form is incorrect.

On your federal return, unemployment benefits go on Form 1040, line 19 (or the equivalent line if you use a different form). You report the full amount you received, not the amount after withholding. If you received benefits in more than one state, you will receive a separate Form 1099-G from each state, and you must report all of them.

If you did not receive a Form 1099-G by early February, contact your state unemployment office. Do not wait until April to file your return — report what you know you received and correct it later if needed.

How unemployment income affects your tax bracket and refund

Unemployment benefits count as income for the purpose of calculating your federal income tax rate. If you had other income during the year — from a job, self-employment, or investments — your unemployment benefits are added to that income to determine your tax bracket. This can push you into a higher bracket and increase the tax you owe overall.

The amount of tax you owe on unemployment depends on your total income for the year and your filing status. A single person with $30,000 in unemployment benefits and no other income will owe federal tax, but the rate will be lower than someone with $50,000 in total income. If you had a job for part of the year and then received unemployment, your total income for the year is the sum of both.

If you had taxes withheld from your unemployment benefits and also had taxes withheld from a job, you may receive a refund when you file your return. If you did not have taxes withheld and owe more than you expected, you can pay the full amount when you file or set up a payment plan with the IRS.

Special situations: partial benefits, back pay, and overpayments

If you received partial unemployment benefits — because you worked part-time or earned some income while on unemployment — the full amount of the benefit is still taxable, not just the portion you actually needed. The same rule applies if you received back pay for weeks you were may be able to access but had not yet claimed.

If you were overpaid and had to repay some of your benefits, you may be able to deduct the repayment on your tax return. This is complex and depends on whether you itemize deductions and how much you repaid. A tax professional or the IRS can help you determine whether you may have access to for this deduction.

If you received benefits in one year but repaid them in a later year, the repayment may be deductible in the year you repaid, not the year you received the benefits. Keep records of any repayment letters from your state unemployment office.

Frequently Asked Questions

Do I have to pay taxes on unemployment if I only received a small amount?

Yes. The IRS taxes all unemployment benefits, regardless of the amount. Even $500 in benefits is taxable income. However, if your total income for the year is below the threshold for your filing status, you may not owe any federal tax. A tax professional can tell you whether you have a filing requirement.

What happens if I don't report my unemployment benefits on my tax return?

The IRS receives a copy of your Form 1099-G and will notice if you do not report it. You may face penalties, interest, and a bill for unpaid taxes. It is always better to report the income, even if you cannot pay the full amount right away — the IRS offers payment plans.

Can I deduct unemployment benefits as a loss?

No. Unemployment benefits are income, not a deductible loss. You cannot reduce your taxable income by claiming that you received unemployment. However, if you repaid benefits because of an overpayment, you may be able to deduct the repayment in some cases.

If I had federal tax withheld, do I still have to file a tax return?

You must file a return if your total income meets the filing requirement for your age and filing status, even if taxes were withheld. Filing is the only way to report all your income correctly and claim any refund you are due. Check the IRS website or ask a tax professional whether you have a filing requirement.

What if I received unemployment benefits in two different states?

You will receive a separate Form 1099-G from each state. Report the benefits from each state on your federal return. If both states tax unemployment benefits, you will owe state tax to both states. Some states offer credits if you paid tax to another state, so check with each state's revenue department.