Unemployment Taxes: Do You Owe Taxes on Unemployment Income?

Unemployment taxes are the taxes you pay on unemployment income. Find out more about these taxes below and whether you might have to pay them.

Do You Pay Taxes on Unemployment Income?

Yes, you have to pay federal taxes on unemployment benefits. This makes sense if you think about it. Unemployment payments are a type of income. They offer a replacement for the income you had before a job loss to help you make ends meet while you look for another job.

The amount of tax you pay on unemployment income depends on factors such as how much income you have overall for the year and where you fall with regard to tax brackets. Your unemployment benefits are just one type of income, and you have to report all your income for the year to figure out how much you might owe. 

What About the Unemployment Exclusion?

In 2021, the federal government passed the American Rescue Plan. That COVID-19 stimulus package included an unemployment exclusion for taxes, but it was specific to 2020.

The reason the federal government passed this exclusion was, in part, because so many people in 2020 ended up drawing unemployment. Reducing the tax burden was a way to provide some economic stimulus while helping families that struggled with job or income loss during the first year of the pandemic. 

The unemployment exclusion specifically said you didn’t have to pay taxes on the first $10,200 of unemployment compensation drawn in the year 2020. The exclusion only applied to people who made less than $150,000 overall. That exclusion doesn’t apply to income received in the year 2021, and as of November 2021, no similar exclusion has been passed.

How Do I Know How Much Unemployment Income I Made?

You should receive a form from your state unemployment office detailing how much unemployment income you received during the year. This form is called a 1099-G, and it’s sent out around the same time W-2 and other tax forms are sent out. Look for yours in January or early February of the year following the year you received unemployment benefits.

Box 1 of this form includes your total unemployment compensation from the state agency in question. Box 4 includes any amount of federal tax already withheld from your payments. That’s important, because if taxes were already withheld, it offsets how much you might owe in April.

Is It Better to Have Taxes Withheld From Unemployment?

Think back to the last time you were hired by a company. You probably completed a lot of forms with the human resources office, and one of those was a W-4. A W-4 tells the employer how many dependents you want to claim so it can withhold the right amount of federal—and sometimes state—taxes from your paychecks. It’s always wise to work with a tax professional to help you decide how best to approach tax withholding.

This practice is why many people don’t end up owing thousands of dollars in taxes at the end of every year. You pay them as you go via the withholdings process.

You can do the same thing with unemployment income. To do this, you have to complete a Voluntary Withholding Request, or Form W-4V, with your state unemployment office. You can choose to have 10% of your unemployment benefits withheld to cover taxes. This can help reduce a surprise tax bill later.

Whether this is the best choice for you depends on your own situation. If you don’t think you’ll be on unemployment long, it may not have a huge impact on your taxes. But if you might be on it for a while, the total amount could create a surprise tax bill.

If you elect to withhold and later figure out you won’t have enough income to cover basic bills and necessities, you can always reverse your decision. You do so by filing a new Form W-4V.

This tax withholding works just like it does with a regular paycheck, too. If the 10% withholdings overpays the taxes you actually owe, you get the difference back in a refund come tax time.

So whether you file for unemployment when you quit or because you’re let go during an economic downturn, make sure to consider the tax ramifications and plan ahead.

The Bottom Line

Taxes are a big deal, and they’re a consideration for almost any type of income you receive. That does include unemployment compensation.

If you know how to do your taxes for free, you can run the numbers at any time to see how much you might owe. And the IRS does offer payment plan options, which can come in handy if you didn’t realize you’d be taxed on that unemployment income.

You Might Also Like

You may need to file the 1099-C form if you have canceled debts. ... Read More

June 14, 2023


lying on taxes
In 2020, the IRS processed more than 3.5 million compliance acti... Read More

March 16, 2022


student loan taxes
Update: Due to the pandemic, the IRS has extended the tax de... Read More

March 9, 2021