Is Unemployment Taxable?

Taxes on Unemployment

If you are currently receiving unemployment benefits and would like to know whether your benefits will be taxed at the federal and state level, you’ve come to the right place. In this post, we will answer the question: “Is Unemployment Taxable?” and provide details on what to expect regarding both federal and state taxes.

In addition, we will address questions we’ve received about COVID-19 related unemployment benefits.

This includes whether the $1200 stimulus check, extra $600 expanded unemployment benefits and the $300 disaster benefits are also taxable.

"Is Unemployment Taxable"

This post will cover:

  • Is Unemployment Taxable?
  • Do I have to pay Taxes on Stimulus Payments
  • Are the $600 Extended Unemployment Benefits Taxable?
  • Are the $300 Disaster Relief Fund Unemployment Benefits Taxable?

Is Unemployment Taxable?

Yes, you have to report any unemployment compensation you receive on your federal tax return and potentially your state return as well.

The money will ultimately be included in your gross income and taxed at your ordinary-income rate.

That’s because the federal government taxes unemployment benefits as ordinary income (like wages).

However, you don’t have to pay Social Security and Medicare taxes on this income.

Most states tax unemployment benefits, too, although there are a few exceptions.

A few states that have a state income tax do not tax unemployment benefits, such as California, Montana, New Jersey, Pennsylvania, and Virginia.

If you request it, your state’s unemployment agency will withhold federal and state (where applicable) taxes from your benefits.

Will I receive a year-end statement?

You should receive a year-end statement from your state’s unemployment agency by January 31 for the previous year’s unemployment benefits.

The form is called a “Certain Government Payments” – Form 1099-G.

"How much are unemployment benefits taxed"

Three ways to pay Unemployment Benefits taxes

You have three ways you can pay the taxes you owe regarding your unemployment benefits:

Option 1 – Deduction from Unemployment Payment

The easiest way is to have your state unemployment office withhold taxes from your unemployment check each time you receive benefits.

This works similarly to when you are receiving a paycheck from an employer and some of your income taxes are taken out.

Your state’s unemployment agency will usually give you the opportunity to make this election when you first apply for unemployment benefits.

However, if you are already receiving unemployment and did not make the election to have taxes withheld, you can contact your local unemployment office to request withholding of federal taxes and state taxes (if any).

Option 2 – Quarter Payments

The next option to pay your income tax while you receive unemployment is to pay quarterly estimated tax payments.

Also, this option may be necessary to avoid penalties for failing to pay enough tax during the year, if you do not have the tax withheld.

Option 3 – Full Payment at Tax Time

Finally, the third option is to pay the tax in full when it is due.

However, note that this option could leave you facing a very large bill during tax time in April.

This is even more so if you received benefits for an extended period due to COVID 19.

Unemployment Benefits Taxes FAQs

We have received several questions about unemployment benefits and taxes, including stimulus benefits that were distributed to help ease the economic effects of people losing their jobs due to coronavirus.

We have answered those questions below:

Are the $600 Extended Unemployment Benefits Taxable?

Under the CARES Act, states are permitted to extend unemployment benefits by up to 13 weeks.

This is under the new Pandemic Emergency Unemployment Compensation (PEUC) program.

In addition, the CARES Act provided an additional $600 weekly unemployment benefit from the federal government to those who lost their jobs due to COVID-19.

This is called the Federal Pandemic Unemployed Compensation (FPUC) program, which expired on July 31, 2020.

Yes, the $600 additional weekly benefit is taxable, just like your regular unemployment benefits.

It is therefore important to make provision for how you are going to pay that tax.

Are the $300 Disaster Relief Fund Unemployment Benefits Taxable?

According to an August 8 presidential memo and subsequent Department of Labor guidance, the federal government will provide additional unemployment benefits of $300.

The extra money is coming from FEMA’s for Lost Wages Assistance program and will last until one of these four things happens:

  • The federal Disaster Relief Fund balance falls below $25 billion.
  • The $44 billion set aside for the LWA program is depleted.
  • Congress enacts a replacement unemployment relief program.
  • The Dec. 27, 2020, deadline is met.

This expanded unemployment benefit is to make up for the expiration of the $600 additional unemployment benefits, which ended on July 31st, 2020.

In fact, the total benefit could be $400.

The government will provide 75% ($300 per week per claimant) of supplemental funds.

In addition, 25% ($100) will come from states, either as an additional payment or as part of the claimant’s regular unemployment stipend.

Yes, the extra $300 unemployment benefit will be considered taxable income in April 2021 when you file your taxes.

Do I have to pay Taxes on Stimulus Payments

The $1,200 stimulus payments that people received from the federal government under the COVID-19 pandemic stimulus bill are not taxable.

They are considered a refundable income tax credit, so this is not considered by the IRS as income that will be taxed at the end of the year.

Technically, the stimulus payments are an advanced payment of a special 2020 tax credit.

This advance is based on your 2018 or 2019 income (your 2018 income is used if you hadn’t filed your 2019 income tax return yet).

Therefore, if your income is higher in 2020, you won’t have to pay back the stimulus payment.

On the other hand, if your income was too high in 2018-2019 to qualify for the stimulus but then it drops to within the adjusted gross income thresholds in 2020, you will receive the credit when you file your 2020 tax return.

What Happens If You Don’t Pay Taxes on Unemployment Benefits?

If you don’t choose upfront withholding or send estimated payments, you are responsible for paying taxes when you file your 2020 taxes.

You might pay an underpayment penalty if your total income tax due exceeds $1,000.

For peace of mind, you should try withholding a portion of your unemployment benefits upfront.

You can do this by asking your state’s agency to withhold taxes on each unemployment benefits check.

Note that you must pay the full amount in by on April 15, 2021, to avoid additional taxes and fees.

How Much Taxes will I have to pay?

Federal income tax ranges from about 10% to 37% of your annual income minus any deductions.

Your taxes are calculated based on your earnings, and as you earn more you pay the rate for the income that falls within that bracket.

For example, you will pay 12% taxes on the income you earn between $9,875 and $40,125.

Income between $40,125 and $85,525 will be taxed at a higher rate of 24%, and so on.

For example, if you make less than $85,525 in 2020, it’s a safe bet to stash away between 12% and 24% of your unemployment checks to prepare for tax time.

Is Unemployment Taxable Summary

We hope this post on the question “Is Unemployment Taxable” was helpful.

If you have further questions about Unemployment Benefits, please let us know in the comments section below.

Be sure to check out our other articles on Unemployment Benefits, including Monthly Unemployment Rates for all 50 States.