You may be surprised to discover that unemployment benefits are taxable. These payouts are subject to federal income taxes and, depending on where you live, state income taxes.
But don’t despair; you can take steps to avoid an unexpected bill at tax time.
How Unemployment Benefits Are Taxed
Unemployment benefits are taxed as ordinary income (like wages) but are not subject to Social Security and Medicare taxes.
You should receive Form 1099-G “Certain Government Payments” from your state unemployment division in January reporting the total amount of compensation you received for 2024. Include this information on Schedule 1 of your 1040 form when you file your federal return.
[Read: How to Collect Unemployment Benefits.]
Form 1099-G also shows how much money, if any, you had withheld from your benefits for federal and state income taxes, which you also report on your tax return.
Most states also tax unemployment benefits as income, although a few exceptions exist. For example, the following states either don’t tax personal income or exempt unemployment income from state taxation.
— Alabama
— Alaska
— California
— District of Columbia
— Florida
— Montana
— Nevada
— New Hampshire
— New Jersey
— Pennsylvania
— South Dakota
— Tennessee
— Texas
— Virginia
— Washington
— Wyoming
[See: Answers to 15 Common Tax Questions]
How to Pay Taxes on Unemployment Benefits
When you receive unemployment benefits, you can have taxes withheld from your payments — like you would from your salary — so you won’t have a surprise bill at tax time.
You can ask to have taxes withheld from your payments when you apply for benefits or you can file IRS Form W-4V, Voluntary Withholding Request with your state unemployment office. Keep in mind that you can request only 10% of each payment be withheld from your unemployment benefits for federal income taxes.
“The decision as to whether or not to have income taxes withheld from unemployment benefits is uniquely yours,” says Mitchell Freedman, a certified public accountant and personal financial specialist in Westlake Village, California.
“If you still receive a refund of taxes withheld or estimated, even after receiving the benefits, consider (withholding) nothing. However, if you are concerned about whether you will be able to write a check to the IRS in April, then have them withhold income taxes, which will take some of the stress out of paying your liability,” he adds.
[Related:What Happens if You Don’t Pay Your Taxes?]
Other Options to Pay Taxes on Unemployment Benefits
You may also have some other options to pay taxes on your unemployment benefits. Instead of having income taxes withheld, you could pay estimated taxes each quarter, which adds more flexibility. Or, you could have more money withheld from your paychecks if you return to work later in the year.
“(Unemployment) is taxable and you should have taxes withheld, if feasible, or make adjustments further down the road through withholding or estimated payments,” says Morris Armstrong, an enrolled agent in Cheshire, Connecticut.
“If you’re strapped for cash and need every dollar for living expenses, I would take out minimal taxes now and deal with the shortage at tax time,” Armstrong says.
However, you may have to pay a penalty if you don’t pay enough taxes throughout the year. Generally, you can avoid a penalty if you owe less than $1,000 or if you pay the lesser of 90% of your current year liability or 100% of your prior year tax liability.
“Keep in mind that interest rates are higher than they have been in years, and shortfalls will cost you more,” he says.
Prepare for the Tax Costs of Unemployment Benefits
Ultimately, it’s wise to remember that the money you receive as unemployment benefits is subject to federal tax — and very often state tax as well.
So, while the funds you get from the government can get you through hard financial times, plan for the additional taxes you may have to pay.
More from U.S. News
Do You Owe the IRS? How to Find Out
What to Do if You Didn’t Pay Estimated Taxes
IRS Offer in Compromise: Everything You Need to Know
How are Unemployment Benefits Taxed? originally appeared on usnews.com
Update 03/19/25: This story was published at an earlier date and has been updated with new information.
