Is Unemployment Taxable? What to Know Before You File

Unemployment benefits can be a huge sigh of relief when you’re between jobs, covering essentials like groceries, gas, and bills while you get back on your feet. But when tax season rolls around, many people wonder, “Is unemployment taxable?”

The answer is yes, but there are a few things to keep in mind before you file. 

In this article, we’ll share everything you need to know about unemployment taxes at both the federal and state levels and how to file them correctly during tax season. 

What Is Unemployment Compensation?

Unemployment compensation is money you may receive if you are unexpectedly laid off from your job at no fault of your own. These benefits are funded through the federal government and the state you live in to help pay for your living expenses while you look for work.  

Does Unemployment Count as Income?

While unemployment compensation is a helpful safety net, it’s still considered income and must be reported on your federal tax return. Unemployment compensation impacts your:

• Total taxable income: The total income listed on your tax return after deductions and exemptions
• Tax bracket: The income range taxed at a specific rate to see how much you owe
• Tax credits: Reductions from the Earned Income Tax Credit (EITC) or the Child Tax Credit

Need help understanding your taxable income to file your taxes correctly? We can help! Contact Us

Are Unemployment Benefits Taxed?

Yes, unemployment benefits are taxed, as the money you receive while on unemployment is still considered a source of income and is therefore subject to income taxes. However, this often depends on where you live. Some states tax unemployment benefits just like the IRS does, while others don’t at all.

Do I Have to Pay State Taxes on Unemployment? 

If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming, or Washington, your state has no personal income tax, so unemployment benefits are not taxed. Even in states that collect state income tax, Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia fully exempt unemployment benefits from state taxes. 

Most other states tax unemployment benefits as regular income. If your state is not listed above, it likely treats unemployment benefits as taxable and subject to state income tax rates. Some of this has recently changed, so be sure to look up the state you live in and whether that state collects state income taxes and/or unemployment income tax.

How is Federal Unemployment Taxed?

Federal unemployment is taxed like any other regular income. The upside? You don’t have to pay for Social Security or Medicare taxes on any unemployment compensation you receive. 

But here’s the catch: taxes aren’t taken out automatically. You must request to have taxes withheld by your state’s unemployment office and complete the W-4V tax form to ensure you have 10% of your benefits withheld for federal taxes. 

How to File Taxes With Unemployment Income

If you received unemployment compensation, you’ll want to make sure you have your taxes filed correctly: 

• Step 1: Get your Form 1099-G* from your state unemployment office to show how much unemployment income you received and any taxes withheld. 
• Step 2: Add the amount listed in Box 1 to your gross income.
• Step 3: Report this amount on your Form 1040 on line 7 or the designated line.
• Step 4: Include any taxes withheld as payments in Box 4 of your 1099-G as federal income tax paid. 
• Step 5: File your tax return as usual. 

*What Is a 1099-G Tax Form?

The 1099-G Tax Form is like the W-2 of unemployment income. It's a tax document you would receive from a government agency if you received unemployment compensation from them. It outlines information like the amount of unemployment compensation and state or local income tax refunds received. 

Unemployment Taxes FAQ

How Do I Know How Much Tax Was Withheld?

You can find out how much tax was withheld in Box 4 of your 1099-G form.

Will Unemployment Income Affect My Tax Refund?

Your unemployment income can affect the size of your tax refund if taxes weren’t appropriately withheld. 

Can Check City Help Me File Taxes With Unemployment Income?

Absolutely. We offer tax preparation services to help you file your unemployment income accurately and avoid any surprises or penalties.

What Was the 2020 Unemployment Tax Break?

A lot happened in the year 2020. The nation experienced a pandemic that caused significant hardship for many people, including taxpayers. To help out those struggling, the government created the American Rescue Plan in 2020. This plan helped to reduce tax liabilities on citizens during the pandemic's financial difficulties.

This law ended up waiving more than $10,000 worth of federal taxes on unemployment benefits per person. Unemployment rates were also incredibly high that year. 

If you had already filed your taxes and paid federal taxes on your unemployment compensation that year, then you may have qualified for a tax refund to make up for that. 

What was the Coronavirus Unemployment Benefits Tax Relief Act?

The Coronavirus Unemployment Benefits Tax Relief Act is a bill associated with the American Rescue Plan Act. This bill was enacted in March 2021 to offer help to taxpayers who were struggling financially during the pandemic. A part of this act included a child tax credit that gave families an extra tax credit for their children. Another part of this act included tax relief for unemployment benefits received. 

In many states, unemployment benefits are still considered income, making them subject to income taxes. But with this act, those tax obligations were waived. This was done to help ease the tax burden on citizens during a time when unemployment rates were unusually high. 

What is the Unemployment Tax Break Refund?

Did you pay income tax on unemployment benefits in 2020 or 2021? Then you can get a tax refund for that money. When you file your taxes next, be sure to include the information necessary to show you received unemployment income from the government and paid taxes on that income. Then, the compensation you are eligible for should show up in your next tax refund.

In Conclusion, 

Hopefully the answer to whether or not your unemployment benefits are taxable or not is clearer now. In many cases, that benefit money is going to need to pay taxes, just like your ordinary income would. But there are some exceptions to that rule if you received those benefits during the pandemic when many tax obligations were being waived, or if you live in a state that doesn't tax that kind of income in general. 

Need help filing your taxes correctly? Contact us today and keep learning with the resources available below.