How Much Tax Will You Pay on Unemployment Income?

Point of Interest

Don’t get caught off-guard. Here’s what you need to know about the taxes on drawing unemployment benefits.

These are uncertain times. No one knows how the situation with COVID-19 will ultimately play out. Between now and then is a lot of fear and stress, not just of contracting the virus or spreading it to others. A lot of people are worried about their ability to provide for themselves and their families. The spike in Google searches for “unemployment benefits” indicates a lot of people are concerned about their ability to get by.

More than 30 million people have filed for unemployment benefits since mid-March. Unemployment insurance is a joint federal-state program that provides temporary financial assistance to workers who have lost their job through no fault of their own. The program offers a measure of stability which is especially important right now.

Unemployment isn’t a paycheck, per se. However, it can work like a paycheck when it comes to taxes. Yes, these benefits are taxed! That may come as a surprise, but it’s better to find out now than to receive a letter from the IRS in a couple of months saying you owe money. We’ll walk through the process of applying for unemployment, and explore your options for paying federal and possibly even state taxes associated with unemployment benefits.

Unemployment income tax, explained

The unemployment program’s funding comes from state and federal payroll taxes. Employers, not employees, are assessed this tax.

The amount an individual pays in taxes on their unemployment benefits really depends on a given person’s situation. The federal government offers recipients two choices. The first option involves having 10% of each payment withheld. The second choice involves making quarterly payments to the IRS. We’ll get into the details of each option in the next section.

RateUnmarried Individuals, Taxable Income Over Married Joint Filing, Taxable Income Over Head of Household, Taxable Income Over
10%$0$0$0
12%$9,700$19,400$13,850
22%$39,475$78,950$52,850
24%$84,200$168,400$84,200
32%$160,725$321,450$160,700
35%$204,100$408,200$204,100
37%$510,300$612,350$510,300

The situation at the state level varies. Most states tax unemployment benefits. Some states like Alabama, California, New Jersey and Florida don’t tax unemployment benefits. In Wisconsin, only a portion of employment benefits is taxable. The key takeaway here is that you want to check your state’s guidelines.

The states also differ in a few other notable ways. First, some states are more generous than others when it comes to weekly benefits. Massachusetts had a pre-pandemic maximum weekly unemployment benefit of $1,234 while Mississippi’s pre-pandemic maximum topped out at $235. Keep in mind these numbers don’t count the additional $600 in compensation per week through July 31 that congress recently authorized. 

Second, states vary on how long a person can collect unemployment benefits. A majority of states allow workers to receive compensation for up to 26 weeks in a calendar year. A handful of states including Hawaii, Kentucky, Indiana and Nevada are more restrictive.

The differences in how a state runs its unemployment program may impact not only the level of compensation you receive but also what you pay in taxes.

How much should you withhold?

It depends. First, let’s talk about the process. Filing an unemployment claim is a fairly straightforward process. Start by contacting the unemployment office in your state. You’ll need to provide information like a Social Security number, address and work history.

Here’s something important to remember. If you want 10% of your benefits withheld from each payment then you’ll need to file Form W-4V. If you decide to wait and make quarterly payments to the IRS there are a few things you should keep in mind. The second option may provide more flexibility in the short term, but it does come with some risk. It’s up to you to do the math and determine how much you need to send every three months. If your numbers aren’t accurate and you underpay, then you might be penalized. It should be noted that Social Security and Medicare taxes are not taken out of unemployment payments.

The question of how much to withhold should be viewed within a broader context. Do you generally get a refund? Do you live in a state that pays out more in unemployment compensation? Do you have deductions? What do your job prospects look like? Is this a minor setback, or do you think it will be difficult to land a new job? All of these factors will impact your decision. If your job prospects look good, but you need a little more money now, then making quarterly payments might be a good option. On the flip side, if the possibility of a sudden, unexpected tax bill is too much of a financial burden, then consider paying as you go.

How to file taxes on unemployment income

Filing taxes on unemployment income shouldn’t add much stress to your life. The process is likely similar to how you filed taxes in the past, but with one or two more forms.

If you received unemployment benefits say, for 2020 then you will receive a Form 1099-G early in 2021. This form provides the sum total of unemployment income you’ll need to report.

Once you have that information, you’ll want to collect other documentation like W-2s if you were employed during the year, or Form 1098-E if you paid interest on your student loans. Keep in mind you might be able to claim expenses related to your job search.

Once you have all the necessary information then it’s time to fill out Form 1040. If you opted not to pay as you go then you might end up having to pay the IRS. However, remember that unemployment benefits are only one part of a larger financial picture.

Expansion of unemployment benefits

The pandemic brought changes to who can receive unemployment and for how long. The program expanded to provide benefits to gig workers, freelancers and the self-employed. The CARES Act also authorized states to provide 13 additional weeks of federally funded unemployment assistance. These tweaks are on top of the additional $600 authorized per payment through the end of July.