Understanding Taxes on Unemployment Benefits: A Comprehensive Guide

Unemployment benefits can be a crucial financial lifeline when you lose your job. However, it’s important to understand that these benefits are subject to taxes. Unless you opt to have your taxes automatically withheld, you’ll need to set aside some of your benefits to pay taxes. Unemployment benefits are subject to federal income taxes and, depending on where you live, state and local taxes as well.

Here’s a detailed guide on how your unemployment benefits may be taxed and how to manage your tax payments to avoid penalties or an unpayable tax bill.

Do You Pay Taxes on Unemployment?

The IRS taxes unemployment benefits as ordinary income. The rate you pay will depend on your total income, filing status, deductions, credits, and tax bracket. Currently, federal income tax brackets range from 10% to 37%. Your income is taxed progressively, which means as a single taxpayer in 2024, you would pay 10% tax on your first $11,600 in taxable income, 12% on income ranging from $11,601 to $47,150, and so on. Higher rates apply as your taxable income increases until it reaches the maximum tax rate.

To determine how much you’ll owe, you’ll need to know the federal tax rates by bracket for the current tax year. When filing your federal tax return, add the amount you received in unemployment benefits to any income you earned from working, bank interest, and capital gains (minus any deductions and tax credits) to calculate your taxable income for the year.

What if You Repaid Some of Your Benefits?

If you repaid some of your unemployment benefits in the same year you received them, you won’t have to pay federal income taxes on the amount you repaid. For example, suppose you received $4,000 in unemployment benefits but repaid $1,500. You would only owe federal income taxes on the $2,500 you kept. If you wait until the following year to repay benefits, you only get a tax benefit if you itemize deductions and you repay $3,000 or more.

Do You Pay State Taxes on Unemployment?

In addition to paying federal taxes, you may be liable for state and local income tax on unemployment benefits as well. It’s a good practice to check tax laws in your area to confirm.

How Do I Report My Unemployment Benefits?

You’ll report unemployment benefits as income on your federal tax return. Around the end of January, you’ll receive Form 1099-G from your state unemployment benefits administrator. Your 1099-G shows the total amount of unemployment benefits you received for the prior year. If you don’t receive a 1099-G, check your state unemployment agency’s website for payment information.

Use Schedule 1 and Form 1040 to report unemployment benefit income on your tax return. If you choose to have taxes withheld from your unemployment benefit payments, you’ll record your total withholding on your 1040 as well.

How to Pay Taxes on Unemployment Benefits

Choose one of two basic methods to make sure your tax bill is covered:

Have Money Withheld from Your Unemployment Checks

You can ask to have 10% of your benefit amount withheld from your benefit payment and applied toward your federal income tax, similar to federal tax withholding on a paycheck. You may be able to request withholding when you apply for unemployment benefits, or use IRS Form W-4V to submit your request to your unemployment benefits administrator.

Pay Quarterly Estimated Taxes

To avoid underpayment penalties, the IRS requires you to make quarterly estimated tax payments if you expect to owe $1,000 or more on your final tax bill. If you choose not to have taxes withheld from your benefit payments—or 10% withholding might not be enough to cover the taxes you’ll owe—use IRS Form 1040-ES to estimate your tax liability and send quarterly tax payments to the IRS.

Whether you choose to have money withheld from your unemployment payments or pay quarterly estimates, you’ll calculate your final tax bill—and pay any remaining amount you owe—when you file your tax return. If you’ve overpaid throughout the year, you’ll receive the difference back as a tax refund.

What to Do if You Can’t Afford to Pay Your Taxes

Paying your tax bill can be especially challenging when you’re living on unemployment benefits. If you don’t have the money (or available credit) to pay, you can request a payment plan from the IRS that will give you an additional 180 days or up to six years to pay.

You’ll be charged a reduced late payment penalty plus interest for as long as you carry an IRS installment balance, but you’ll avoid collection consequences including seizure of assets. Setting up an IRS installment plan doesn’t require a credit check and won’t affect your credit score.

Frequently Asked Questions

Should I Have Taxes Withheld From Unemployment Benefits?

Yes, having taxes withheld from your unemployment benefits can help you avoid a large tax bill at the end of the year. You can request to have 10% of your benefit amount withheld for federal taxes.

Do You Pay State Income Taxes on Unemployment?

It depends on the state you live in. Some states tax unemployment benefits, while others do not. Check your state’s tax laws to confirm.

Which States Don’t Tax Unemployment Benefits?

States that do not tax unemployment benefits include California, New Jersey, Oregon, Pennsylvania, and Virginia, among others. Always verify with your state’s tax authority for the most current information.

The Bottom Line

Making ends meet on unemployment benefits can be challenging. Having to pay taxes on your unemployment benefits only adds to the challenge. While being unemployed doesn’t have a direct impact on your credit, using credit to cover your expenses while you’re on unemployment can increase your credit utilization and put you at risk for late or missed payments. You can check your credit score and credit report for free any time from Experian, to help protect your credit when you’re between jobs.

If you need assistance with managing your finances or understanding your tax obligations, O1ne Mortgage is here to help. Our team of experts can provide you with the guidance you need to navigate these challenging times. Call us at 213-732-3074 for any mortgage service needs. We’re committed to helping you achieve financial stability and success.