Is Unemployment Taxable Income?

SHORT ANSWER: The IRS considers unemployment benefits taxable income.

The tax season deadline is just around the corner. Understanding and accurately reporting all income for last year is at the top of many people's to-do lists. Were you unemployed last year and wondering "Is unemployment taxable income?" — if so, this guide is for you. 

While unemployment benefits can be a financial lifeline if you lose your job, the IRS still considers it income. Any income you earn is taxable. However, the forms you receive at tax time may vary depending on who pays your unemployment income.

Whether you receive unemployment income from your state or a supplemental benefit through your former employer can affect the forms, but it won't change the fact that it’s all considered taxable income.

Below, you'll find a guide to unemployment taxes that will walk you through how unemployment benefits work and what forms you need to file your taxes.

How Are Unemployment Benefits Taxed?

Unemployment compensation is the common name for the federal-state unemployment insurance system (UI) that helps many people who have lost their jobs. Unemployment benefits can help you by temporarily replacing part of your wages while you look for work.

Generally, to be eligible for unemployment benefits, you must have lost your job recently due to no fault of your own. Unemployment compensation is paid to people who have lost their jobs through circumstances that aren't their fault, such as being laid off or if the business closed.

State Policies

States have individual policies and requirements. If you lose your job, you may be entitled to unemployment benefits through your state if your separation occurred through no fault of your own and if you meet certain income requirements set by your state.

Unemployment benefits may be calculated as a percentage of the average of your pay over a recent 52-week period and are usually paid by an unemployment check or via direct deposit. In these cases, you may need to make estimated payments, have income taxes withheld from your benefits or create a plan for paying the amount you’ll owe in taxes on your federal income tax return.

Benefits Administration

The U.S. Department of Labor manages the Federal-State Unemployment Insurance Program and several other unemployment insurance programs for laid-off federal employees, ex-service members, those unable to work because of a disaster and other benefits for people who have remained unemployed and have exhausted their regular unemployment payments.

States manage this federal program, which uses a mix of federal and state tax-derived dollars to pay a part of your income for 12 to 26 weeks, depending on your state, though it might be extended depending on your state and its restrictions.

In most cases, your employer pays for unemployment benefits via employment taxes, and the benefits are administered by your state. Some states require taxes by employees that also pay into the fund. If you are in the District of Columbia, the taxes are paid into the Federal Unemployment Trust Fund, which administers the benefits.

Maximum Benefits

The maximum weekly amount you receive for unemployment depends on your state, your former income and how many dependents you have.

You may also receive a supplemental unemployment benefit (SUB) plan through your former employer or your labor union. These benefits are still taxable even if not administered by the government. Most SUBs require that you also draw state unemployment benefits to be able to claim SUB benefits. The SUB is designed to supplement your state benefits.

Taxation

Do you pay taxes on unemployment? Yes. The unemployment compensation you receive counts toward your adjusted gross income (AGI). Depending on how you receive benefits, your employer may pay taxes on the benefits or withhold taxes, you may need to make estimated payments or you might have to create another plan for paying the amount you’ll owe when you file your federal income tax return.

In addition, if your state offers reemployment assistance benefits, these are taxable income. In some states, such as Florida, you can elect to withhold 10% of your weekly benefit amount to cover your taxes due to the IRS. You can also check out the 2023 and 2024 tax brackets to estimate your tax obligations. 

Is Unemployment Taxable at the Federal Level?

Unemployment benefits are taxed at the federal level and subject to federal income tax. You will usually receive a Form 1099-G from your state’s unemployment benefit office, which shows how much of your benefit is taxed and what you withheld if anything.

If you received unemployment benefits through a SUB plan, those benefits should be included on your W-2 as regular wages. If you receive unemployment benefits through a private fund that you paid into, similar to an SUB but not through your employer, you only have to pay taxes on the amount you received over your contributions, and you report that income on Form 1040.

Is Unemployment Taxable at the State Level?

Yes, unemployment may also be taxable at the state level, depending on your state's income tax and unemployment policies. Although they administer the uninsurance program, not all states require taxes to be paid on unemployment benefits. 

Nine states don’t require taxes on unemployment benefits, so if you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming, you’re in luck. But the list is longer, as certain other states don’t collect taxes on unemployment benefits or only tax part of the benefit amount. 

States where you don't need to pay income tax on unemployment income are:

• Alabama
• Alaska
• California
• District of Columbia
• Florida
• Montana
• Nevada
• New Hampshire
• New Jersey
• Pennsylvania
• South Dakota
• Tennessee
• Texas
• Virginia
• Washington
• Wyoming

If you live in one of the other states, you must include your unemployment benefits in your taxable income amount, just as you do for your federal tax return. If you're now retired, you can also check states with no tax on retirement income. 

Is Unemployment Taxable at the Local Level?

Whether you have to pay unemployment benefits at the local level varies. These benefits may be taxed at the city level. Several cities in the U.S. have separate taxation requirements. If you live or work in Cincinnati, Cleveland, Columbus, Toledo, Detroit, Kansas City or Louisville, you may need to pay municipal taxes on your unemployment benefits. You can speak with a certified public accountant (CPA) or tax specialist to understand local requirements. 

How to Pay Taxes on Unemployment Benefits

Filing taxes to include your unemployment income is not much different than filing taxes and having income from more than one source. You need to gather together the requisite forms and check any available deductions.

When filing your taxes to include your unemployment income, gather your W-2, 1099-G, 1099 and 1040.

W-2: You’ll need to enter data from your W-2 from your previous employer as long as you were employed at some point in the tax year. If you received unemployment benefits from a SUB, your W-2 will include those benefits as well.

1099-G: Your state unemployment agency will mail you this form, which identifies the total amount of benefits paid to you and the amount of federal taxes withheld, if any.

1099: If you worked as a contractor or freelancer while unemployed, you need to include that income on your taxes. If you received over $600 from a single source, the company you worked for should send you a 1099 form, most commonly 1099-NEC or 1099-MISC.

1040: If you received supplemental unemployment benefits through a private fund that you paid into, you only have to pay taxes on the benefits you received that are over the amount that you paid into the fund. The SUB fund will inform you of the amount of your taxable benefits.

Deductions

You may have incurred some costs while unemployed and job hunting. Some of those costs may be deductible if the job you are looking for is within your field. You may be able to deduct costs for printing and mailing your resume, travel to job interviews or to research a job and payments to employment and headhunting agencies. 

You may be able to include relevant deductions if you plan to itemize deductions on your federal tax return. A tax professional, CPA or financial adviser can help you decide whether this is an option in your case. 

If you can't pay your federal taxes, you have options and steps you can take. First, you should still file your tax return on time. The IRS has penalties for filing late and for paying late. You can avoid some penalties by filing your tax return on time, even if you can't send any money. 

If you need more time to file your tax return, you can apply for an extension. The extension gives you more time to file, but it isn't an extension of the time you must pay.  

You have another option. The IRS lets people pay in installments over time. If you sign up for an IRS tax payment plan installment agreement, you can use this option to pay your tax bill over time. You can sign up directly with the IRS and choose from different payment plans depending on how much you owe and how much time you need to pay the full amount. 

Final Tips Preparing to File Taxes 

When you fill out unemployment forms, ensure you understand the implications so you’re not surprised when filing. Is unemployment taxed? Yes. But you can be prepared when tax time comes around. Unemployment benefits are taxable income at the federal level, though not all states require you to pay taxes on them. 

It pays to understand how unemployment benefits are taxed and what you need to do to file your taxes. Gathering paperwork, preparing beforehand and consulting a tax professional, if necessary, can make filing easier. You can also learn how to file taxes for free, find the best free tax software or research the best ways to file taxes here.