How the federal government taxes unemployment benefits
The IRS treats unemployment compensation the same way it treats wages: it’s ordinary income, taxed at your regular marginal rate, not some special lower rate. Each January, the agency that paid your benefits sends you Form 1099-G (Certain Government Payments) showing the total benefits paid in Box 1 and any federal tax withheld in Box 4.
You report the Box 1 amount on Schedule 1 of your Form 1040, in the additional income section. The total additional income from Schedule 1 flows to Form 1040 and is added to your other income sources to determine your total income, just like a paycheck would.
States tax on unemployment
State treatment of unemployment income differs among states. There are three possibilities depending upon where you live:
- Your state does not tax any income
- Your state takes income generally but exempts unemployment
- Your state taxes income, including unemployment, as ordinary income
State rules and exemptions can change often, so be sure to confirm current unemployment tax treatment with your state’s taxing authority.
How to have tax withheld from unemployment benefits
Withholding on unemployment benefits is optional, not automatic—nothing gets withheld unless you take action.
- Voluntary withholding: File Form W-4V with the agency paying your benefits to have a flat 10% withheld for federal taxes (10% is the only option). Some states offer separate state withholding on top of federal withholding.
- Quarterly estimated payments: If you’d rather not withhold, or withholding won’t cover your full liability, you can send quarterly estimated payments directly to the IRS using Form 1040-ES.
How unemployment affects other credits and your tax bracket
Unemployment compensation doesn’t count as earned income (money you receive from working), so it doesn’t help you qualify for or increase the Earned Income Tax Credit the way wages would. It does, however, count toward your adjusted gross income (AGI), which is your total gross income minus specific adjustments. A higher AGI can reduce or eliminate other credits and deductions that phase out at higher income levels.
Unemployment benefits also stack on top of any other household income you have for the year, such as a spouse’s paycheck, part-time work, or a side hustle. Your combined, total household income, including unemployment compensation, determines your tax bracket; what appears to be modest unemployment benefits can push your household into a higher bracket.
