Unemployment benefits have been a lifeline to many taxpayers—especially when it came to the COVID-19 pandemic. If you received or currently receive unemployment, you may wonder if you’ll need to pay taxes on the benefits this upcoming tax season. 

There are two things to consider: 1) Federal government taxes and 2) How states charge taxes on unemployment benefits. Here’s what you should know about taxes on unemployment benefits.

Congress Provided a Tax Break on Some Unemployment Benefits

The American Rescue Plan Act, signed on March 11, 2021, provided that taxpayers would not have to pay federal unemployment taxes up to a certain threshold.

The tax break applies for unemployment benefit income whether you’re single or married and filing jointly. You won’t pay federal tax on the first $10,200 of your unemployment benefits if you’re single. If you’re married and filing jointly, both you and your spouse won’t pay federal tax on the first $10,200 of your unemployment benefits.

Whether you’re single or married and filing jointly, there’s an income limit to take advantage of the tax break. To determine whether or not you’re eligible for the tax break, you’ll calculate your total unemployment benefits received for the 2020 tax year. In either case, the maximum modified adjusted income you can earn is $150,000.

There are two things to know if you filed your 2020 taxes before the changes to the American Rescue Plan went into effect. 

First, if you filed the 2020 tax return before the American Rescue Plan tax break, you do not need to file an amended return.

Second, suppose you’ve claimed tax credits, including the Child Tax Credit and Earned Income Tax Credit. In that case, the IRS will automatically issue refunds if you qualify for a higher amount and the tax break changes your income level.

How does the federal government tax unemployment benefits?

Federally, unemployment benefits are a form of income. This also means that unemployment benefit income is taxable. If you’ve received unemployment benefits, you’ll need to pay federal taxes on this income. 

You have three options to pay federal taxes unemployment benefits throughout the tax year:

  1. Have your federal taxes withheld 
  2. Pay unemployment benefit taxes quarterly as estimated taxes 
  3. Pay unemployment benefit taxes as one payment when it’s due

If you’d like to request to have your federal taxes withheld before receiving unemployment benefits, you can choose to do so. 

When you apply for benefits, you can complete Form W-4V, Voluntary Withholding Request, to have 10% of your unemployment payment held for federal taxes. 

States Have Different Methods of Handling Unemployment

State taxes work differently compared to federal unemployment taxes. There are more categories to consider overall, with three ways you may pay unemployment benefit taxes.

The process is also different because some states charge no income tax on unemployment income, others exclude unemployment benefits from income taxes, and some may charge taxes for part of your unemployment income.

There are seven states which charge no state income tax. This also applies to unemployment benefit income, which means that you won’t pay state income tax for your unemployment benefit income. You won’t pay taxes on unemployment income in the following states: 

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

You also won’t pay state income taxes in New Hampshire and Tennessee. These states have an income tax on investment income but not unemployment benefits.

Third, some states collect no income tax on unemployment benefits but charge a general income tax:

  • Alabama
  • California
  • Montana
  • New Jersey
  • Pennsylvania
  • Virginia

Finally, Indiana and Wisconsin may tax only a portion of your unemployment benefits. If you live outside the 17 above states, you may pay federal and state unemployment taxes.

The process to pay state taxes is the same as federal taxes. You have the option to pay taxes on unemployment benefits by: 

  • Requesting to have your state taxes withheld
  • Paying taxes quarterly as estimated taxes (The due dates for state unemployment taxes may differ from the federal unemployment tax deadlines)
  • Paying your taxes in full like the federal unemployment tax option

How to Report Unemployment Benefits

To report unemployment benefits, you’ll need three forms

  1. Form 1040/1040-SR (U.S. Individual Income Tax Return/U.S. Tax Return for Seniors)
  2. Form 1099-G (Certain Government Payments)
  3. Schedule 1 (Additional Income and Adjustments to Income)

You’ll receive a Form 1099-G which provides the amount of unemployment compensation that you received. This form will show your unemployment compensation paid to you throughout the year, in Box 1. 

Next, you’ll report the amount of unemployment benefits from Form 1099-G to Line 7 of Schedule 1. If there’s any federal income tax withheld, you’ll enter the amount in Box 4 of this form as well. If you live in a state where you’ll pay state income tax, you’ll see the amount of tax withheld in Box 11.

Finally, you’ll enter the amount in Box 4 of Form 1099-G on Line 25b of Form 1040 or Form 1040-SR.

Work with 1-800Accountant to Prepare Your Taxes

Paying taxes on your unemployment benefits is very important. Knowing whether you have to pay both federal and state taxes or just state taxes on your unemployment benefits can make a big difference when you have to pay taxes.

When it’s time to pay taxes, you want to ensure that it’s the correct amount to avoid penalties or underpayment. Work with experienced professionals at 1-800Accountant for help with your tax needs.

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Written by Joshua Meller

Josh Meller is Sr. Manager of Accounting Services in the Pacific zone at 1-800Accountant. Before shifting into tax & accounting, he work...