Unemployment benefits can help you get by in the event of job loss, but this money is subject to taxes just like any other source of income. How much your unemployment benefits are taxed depends on your filing status, tax bracket, and state of residence.
In this guide to unemployment benefit taxes, you’ll learn the ins and outs so you can pay Uncle Sam what you owe. Read on to find out:
• Are unemployment benefits taxable?
• How are unemployment benefits taxed?
• What are tips for paying taxes on unemployment benefits?
Do You Have to Pay Taxes on Unemployment Benefits?
Yes, you do have to pay taxes on unemployment benefits. They are taxable like any other income. That means you won’t actually get to keep all the money the government gives you while you’re unemployed. You’ll have to give some of it back, just as you do on many other forms of money you receive. It’s simply part of being a taxpayer.
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How Is Unemployment Taxed?
Now that you’ve learned that unemployment benefits are taxable, consider the details. How much are the taxes, is it just federal or state taxes too, and how do you pay them?
How Much Are Unemployment Benefits Taxed?
No matter which state you live in, your unemployment benefits are taxed at the federal level. That means everyone — including residents of states without income taxes — must pay taxes on unemployment compensation.
How much you owe depends on your filing status and tax bracket. The United States is on a progressive tax system: In general, the higher your adjusted gross income (AGI), the more you’ll pay in taxes.
For the 2022 tax season (filed in 2023), there are seven federal tax brackets, ranging from 10% to 37%.
Before filing your taxes, you’ll receive a Form 1099-G, Certain Government Payments, reflecting your unemployment benefits. This form will indicate how much unemployment compensation you received as well as how much was withheld, if applicable. You’ll need this form, plus any records of quarterly payments (more on those below) when filing your taxes.
Unemployment Benefit Taxes at the State Level
When determining how much unemployment benefits are taxed, don’t forget that federal taxes may not be the only funds due. Depending on where you live, you may have to pay state income taxes on your unemployment compensation, too. Nine states do not have personal income taxes on what are considered wages:
• New Hampshire
• South Dakota
If you live in one of those nine states, you don’t have to pay state income taxes on unemployment benefits.
That said, four states that do have a state income tax also don’t tax your unemployment compensation:
• New Jersey
If you live in one of the remaining 37 states (or Washington, D.C.), you’ll have to pay state taxes on any unemployment earnings.
How to Pay Taxes on Unemployment Benefit
Like it or not, you’ll owe taxes (federal and maybe state) on any unemployment compensation. Now that you know how unemployment is taxed, consider how you can pay those taxes. You have two main options:
• Have the taxes withheld like you would from a paycheck
• Estimate and pay the taxes each quarter
Here’s a closer look at each option.
When you initially apply for unemployment, you can ask to have taxes withheld from your payments. However, federal law has established a flat rate of 10% for tax withholding for unemployment benefits.
When you receive income as wages, you can usually specify how much you want to have withheld via filling out Form W-4.
If you expect to be in a higher tax bracket and need to pay more in taxes than what’s being withheld, you can make quarterly estimated payments for the difference.
If you’re currently receiving unemployment compensation and taxes aren’t being withheld, you can submit Form W-4V , Voluntary Withholding Request, to initiate the 10% withholding on future benefit distributions.
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To avoid owing an underpayment penalty when you file your taxes, you may need to make quarterly estimated payments on your unemployment earnings. You can use Form 1040-ES and send in your payment by mail, or you can pay online or over the phone.
If you’re new to estimating taxes, you can use the IRS resource for quarterly taxes , work with an accountant, or use tax software.
Tips for Paying Taxes on Unemployment Benefits
Being unemployed can be stressful, and on top of that, it may be hard to figure out how to properly pay taxes on unemployment benefits you receive. Follow this advice which can help simplify and clarify the process.
• Opting into tax withholding: When you apply for unemployment, you can opt into automatic tax withholding at a flat 10% rate. While it may not be enough to cover your entire tax liability, it’s a good start — and can keep you from overspending your unemployment compensation.
• Setting aside money in a high-yield savings account: If you don’t opt in to withholding (or if 10% is not enough to cover your tax liability), you’ll need to pay quarterly estimated taxes on your unemployment income. To avoid accidentally spending that money before it’s due, it’s a good idea to calculate what you’ll owe and put it in an online savings account that you won’t touch until it’s time to pay Uncle Sam. Bonus: You’ll be earning interest on the money.
• Keeping track of all your earnings and paperwork: Tax filing can be complicated — there are lots of forms to collect and statements to reference. Keeping clean records of benefit distributions and quarterly payments throughout is crucial to preparing for tax season.
• Using IRS Free File: Because you have to pay taxes on all income, including unemployment, you’ll likely want some help. If your adjusted gross income is below the $73,000 threshold, you can get free guided tax preparation through IRS Free File . If your AGI is too high but you’re feeling overwhelmed by how complicated your taxes are, it might be a good idea to pay for tax software or hire an accountant.
• Being aware of unemployment fraud: It’s possible for criminals to use your personal information to falsely make unemployment claims in your name. If you receive Form 1099-G for unemployment compensation but did not receive any unemployment benefits, follow the Department of Labor’s steps for reporting unemployment identity fraud .
Like other forms of income, unemployment benefits are subject to taxes. If you aren’t having taxes withheld from your unemployment compensation — or if the flat 10% rate is not high enough — the IRS requires that you pay quarterly taxes. Paying what you owe on unemployment benefits is an important and necessary step in correctly filing your tax return.
When it comes to paying taxes, you may want to stash away money that will be due later in the year. Or you might need a good place for a tax refund to land. In either of those scenarios (or if you’re just ready to bank smarter), consider opening a SoFi bank account. With our Checking and Savings account, you’ll save and spend in one convenient place, plus you’ll earn a competitive annual percentage yield (APY) and pay zero account fees, both of which can help your money grow faster.
Do you pay less in taxes when you’re on unemployment?
Your tax rate depends on your adjusted gross income. If you earned less income because you were unemployed — and your unemployment checks are smaller than your paychecks had been — you can expect to pay less in taxes.
Are unemployment benefits taxed in states with no income tax?
Unemployment money is taxed at the federal level no matter which state you live in. However, if you live in a state with no state income taxes, you won’t have to pay state taxes on your unemployment benefits. Four states that levy income taxes also exempt you from paying those state taxes on unemployment compensation: California, New Jersey, Pennsylvania, and Virginia.
Was pandemic unemployment taxed?
Pandemic unemployment was not taxed for the 2020 tax year — to a certain degree. Following the historic job loss associated with the initial wave of COVID-19, the government passed the American Rescue Plan Act of 2021, which made the first $10,200 of unemployment benefits non-taxable.
However, this was a one-time exclusion. Though the pandemic continued beyond the 2020 tax year, unemployment income became completely taxable once again.
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