Is Unemployment Taxed? Here’s What You Need To Know

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If you were recently laid off or furloughed from your job, you may be eligible for unemployment compensation. Benefits are administered at the state level, and you must meet specific requirements to qualify.

But do you pay taxes on unemployment? Read on to find out how unemployment benefits are taxed and at what tax rate.

Are unemployment benefits taxed? Yes and no

Yes, you can expect to pay income taxes on unemployment benefits on your federal tax return (though there are some exceptions). Your tax rate will be based on your current federal income tax rate. However, whether you’ll be taxed at the state level depends on where you live.

Federal taxes on unemployment benefits

The IRS categorizes unemployment compensation as taxable income. In most instances, it must be included on your federal income tax return.

If you think your benefits might qualify for an exception to this rule, you can use the IRS’ interactive tax assistant tool to see if your unemployment benefit payments are taxable. Or check out this IRS page to see the rare instances when unemployment benefits aren’t taxable at the federal level.

State taxes on unemployment benefits

Some states impose taxes on unemployment benefits, while others don’t. Other states tax just a portion of your benefits.

• The nine states with no income tax exclude unemployment compensation from taxes altogether.
• Some states, including California and New Jersey, levy income taxes, but they exclude unemployment compensation from taxable income, so your benefits will be tax-free at the state level.
• Some states tax a portion of the unemployment benefits you receive.
• Some states tax all of your benefits as regular income.

Refer to your state’s tax website to find out if unemployment benefits are taxed. (This Federation of Tax Administrators page links to each state tax website.)

How to report unemployment benefits on your tax return

You should receive Form 1099-G, Certain Government Payments, from your state’s unemployment office by the end of January for the prior tax year. It includes the figures you’ll need for your federal and state return (if applicable).

Here’s how to report unemployment compensation on your income tax return:

• Step 1: Enter the amount from Box 1 on Form 1099-G into Line 7 of Schedule 1 (Additional Income and Adjustments to Income) of Form 1040.
• Step 2: Enter the withholding amount, which is included in Box 4 on Form 1099-G, into Line 25b of Form 1040.
• Step 3: Include the withholding amount from Box 11 on Form 1099-G if you’re required to include unemployment compensation on your state tax return.
• Step 4: Be sure to include Schedule 1 when you file your return.

If you didn’t receive a 1099-G or if it contains errors, use this directory to find your state’s unemployment agency website to request a copy or a correction.

How to handle a tax bill if you’re unemployed

If you get hit with a tax bill while you’re unemployed, don’t panic. Instead, file your federal income tax return (and state return if applicable) as you usually would. You can also request an extension if you expect to owe, but keep in mind that doing so only buys you more time to file your return — you’ll likely incur late payment penalties and interest if you don’t pay your bill by the original due date.

Even if you can’t pay the tax bill right away, you aren’t entirely out of luck. You can set up a payment plan with the IRS to resolve your tax debt over time. Start by requesting an arrangement online through the IRS online payment plan tool. There’s also the option to apply for a payment plan by phone, mail or in person at an IRS taxpayer assistance center.