Do You Have to Pay Taxes on Unemployment Income?

The answer is usually yes

People standing in line at Job and Training Fair

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It's a natural question if you've lost your job and are faced with preparing your tax return: Are unemployment benefits considered taxable income?

In most cases, the answer is yes. The Internal Revenue Service (IRS) reminds taxpayers that there are different types of unemployment compensation, and they may be taxable. 

The IRS offers an interactive tool on its website to help you determine whether the income you receive while you're unemployed is taxable. If it is, you can take some steps to pay throughout the year and avoid owing the IRS taxes or penalties at tax time.

Withholding Taxes From Unemployment Compensation

Unemployment, generally speaking, is a benefit paid by state or federal governments to help people who lost their job through no fault of their own. It doesn't apply if you quit or were fired for cause. To apply for unemployment benefits, you would contact your state's unemployment insurance program.

Certain limitations will apply as to the amount you're eligible to receive, and it usually depends on your earnings and how long you worked for the company.

The federal government expanded access to unemployment insurance in March 2020, covering workers who previously were ineligible if they were affected by the coronavirus.

Voluntary Withholding

The IRS views unemployment compensation as income, and generally taxes it accordingly. You can elect to have federal income tax withheld from your unemployment compensation benefits, much like income tax would be withheld from a regular paycheck.

Unfortunately, you don't have a choice as to how much you want to be withheld. Federal income tax is withheld from unemployment benefits at a flat rate of 10%. Depending on the number of dependents you have, this might be more or less than what an employer would have withheld from your pay.

Use Form W-4V, Voluntary Withholding Request, to have taxes withheld from your benefits. Complete the form and give it to your unemployment office.

Making Estimated Tax Payments

If you elect not to have taxes withheld from your unemployment benefits, you may be required to make payments directly to the IRS instead as quarterly estimated tax payments. This works out to a payment about once every three months while you're collecting unemployment benefits instead of 10% withheld from every unemployment check, so doing it this way may give you a little bit of wiggle room when money is tight.

You might even have to make quarterly payments in addition to withholding from your benefits. In most cases, you're obligated to make estimated payments if you expect that you'll owe at least $1,000 after accounting for taxes withheld from all your sources of income, and if you expect that your withheld taxes plus any refundable tax credits you're eligible for will be less than 90% of what you'll owe or 100% of the total taxes you paid last year.

Run the numbers both ways to determine your best option, keeping in mind that unemployment benefits vary by state and replace only about half your previous wages, on average.

It can be complicated, so you might want to consult with a tax professional. If you don't pay enough tax, either through withholding or estimated tax payments, you could accrue additional penalties

Reporting Unemployment Income 

Your state's unemployment agency will report the amount of your benefits on Form 1099-G. The IRS gets a copy, and so do you. The form will also show any taxes you had withheld.

The IRS issued a whole new Form 1040 for the 2019 tax year, so you'll have to report the unemployment income you received on a different line than in the past.

To report these amounts, you must use the new Schedule 1 that goes with the revised 1040. Enter the amount of your unemployment compensation on line 7 of Schedule 1, and the amount of any withholding from those benefits on line 17 of Form 1040. Then transfer the total from line 22 on Schedule 1 to line 8a on the new 1040.

The Bottom Line

Ultimately, your unemployment income will be taxed right along with any other income you earned during the year. Use Form W-4V to withhold any tax from your unemployment income, or pay quarterly taxes to ensure you don't owe the government any penalties come tax season. And always consider working with a tax professional if you have questions about your specific situation.

Article Sources

  1. IRS. "Publication 525: Taxable and Nontaxable Income," Page 27. Accessed April 17, 2020.

  2. IRS. "Five Tax Tips on Unemployment Benefits." Accessed April 17, 2020.

  3. TurboTax. "Guide to Unemployment and Taxes." Accessed April 17, 2020.

  4. "Unemployment Help." Accessed April 17, 2020.

  5. "Learn More About Unemployment Benefits." Accessed April 17, 2020.

  6. IRS. "Form W-4V: Voluntary Withholding Request." Accessed April 17, 2020.

  7. IRS. "Topic No. 418 Unemployment Compensation." Accessed April 17, 2020.

  8. IRS. "Estimated Taxes." Accessed April 17, 2020.

  9. Center on Budget and Policy Priorities. "Introduction to Unemployment Insurance." Accessed April 17, 2020.

  10. IRS. "Instructions for Form 1099-G," Page 4. Accessed April 17, 2020.