Are unemployment benefits taxable?

All unemployment compensation is taxable income, and you need to report it as income on your tax return. Unemployment compensation includes all federal and state unemployment insurance (simply called unemployment benefits), Federal Unemployment Trust Fund benefits, and railroad unemployment benefits. For the current coronavirus pandemic, all federal and state unemployment benefits will be taxable as 2020 income, which you report on your tax return early next year.

Your income from unemployment benefits is reported on Form 1099-G. Income reported to you on other forms isn’t considered unemployment compensation by the IRS. For example, workers’ compensation and severance pay are reported on a W-2 and aren’t unemployment compensation.

If you choose not to withhold tax from your benefits, make sure to pay enough during the year to cover at least 90% of the tax you will owe the IRS. Quarterly estimated taxes may be necessary to avoid underpayment penalties from the IRS. This is especially true during the coronavirus pandemic, now that unemployment benefits have been increased and extended. Read more on how the coronavirus will affect your taxes.

What is unemployment compensation?

You have to pay federal income tax on all unemployment compensation. This includes everything listed in Box 1 of Form 1099-G, which you should receive in the January or February before you file your income taxes. If you receive multiple types of unemployment benefits, like unemployment insurance in addition to California's Family Temporary Disability Insurance, you may receive a 1099-G for each type of benefit.

Examples of unemployment compensation include

• Unemployment insurance (UI) benefits from a state or local government

• Federal Unemployment Trust Fund benefits

• Railroad unemployment insurance benefits

• Disability insurance or paid family leave payments sent to you as a substitute for unemployment compensation

• Disaster Unemployment Assistance (DUA)

To combat the economic fallout from the coronavirus (COVID-19), Congress has expanded unemployment insurance benefits for 2020. These benefits are treated the same as other unemployment benefits you receive from your state.

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Payments that are not unemployment compensation

When you file your taxes, the following are not included in your unemployment compensation:

• Severance pay

• Supplemental unemployment benefits plans (SUB plans)

• Workers’ compensation

The pay and benefits above are all reported to you on Form W-2. Severance and benefits from SUB plans are taxable income, though workers’ compensation is not. Benefits you receive from a private fund you voluntarily contributed to — like a SUB plan that you don’t get through your employer — are generally tax-exempt. You would only pay tax on any benefits you received in excess of the amount you contributed.

Paying taxes on unemployment

When you file for unemployment benefits, you will have to choose whether or not you want the government to withhold income taxes from your benefit payments. You’ll still have to pay the tax whether you have it withheld or not. Accepting withholding will make filing taxes easier, because you will have already paid some, if not all, of the income tax you owe. However, you may not want to withhold tax if you need to have the full value of the benefit payment.

To learn more about how taxes work, check out our guide to filing taxes.

How to withhold taxes

If you choose to withhold taxes, you will need to complete Form W-4V. There are four options for how much income tax you want the government to withhold: 7%, 10%, 12%, 22%. The rate you choose will depend on your total income that hasn’t been taxed and the value of your benefit that you would like to receive each month. If you need help deciding, there is an IRS calculator to estimate withholding.

Do I need to pay estimated tax?

If you don’t pay at least 90% of the income tax you owe for the year, you may have to pay interest and fees to the IRS. You can avoid this by making estimated tax payments. These are simply payments you send the IRS each quarter to cover the tax you owed from that quarter’s income.

Here are a couple of considerations to make before paying estimated taxes:

• Did you withhold tax this year from another job? If so, you may have already paid enough tax to avoid any penalties from not taxing your unemployment benefits.

• Does your spouse withhold tax? If your spouse’s employer withholds tax and you plan to file a joint return, your spouse can increase the tax withholding on their W-4 form to cover some of your liability. You can generally update this form online, and you can do it as often as you need.

Learn more about who needs to pay estimated taxes.

How to report unemployment benefits on your taxes

If you received unemployment benefits at any point during the year, you should receive a copy of Form 1099-G. It lists your unemployment compensation on line 1. When you file your tax return, report that compensation on line 7 of Form 1040 Schedule 1. The information on Schedule 1 then goes on your line 8a of Form 1040 (the main tax form). For more help, try our guide to Form 1040.