Are Unemployment Benefits Taxable?

application for unemployment benefits on a desk with a pen on top

If you were one of the millions of Americans who received unemployment, here’s what you need to know about taxes.

Key takeaways:

  • Unemployment benefits are taxable after the first $10,200
  • Some states don’t require an additional state income tax
  • Use Form 1099-G, which you should receive from the IRS

The COVID-19 pandemic led to record closures and lay-offs, disrupting almost every industry. The unemployment rate hit its peak in April 2020 at 14.7%, which was the highest rate and the largest monthly increase in the history of Bureau of Labor Statistics data, which dates back to January 1948. 

The pre-pandemic unemployment rate has receded, and things are looking up. But millions of Americans will receive unemployment this year. And those who receive these benefits may be wondering how to handle the income on a tax return. 

Unemployment benefits are taxable, but there are other considerations to be aware of. Here’s what you need to know:

Do you have to pay taxes on unemployment benefits?

Unemployment is a way for the government to help out workers when they lose their jobs. 

The CARES Act introduced in March 2020 provided new tax provisions and relief for those in need. The Act expanded unemployment benefits to gig workers, independent contractors, and other self-employed individuals, and the compensation amount received was increased to include an additional $600 per week. Another relief package signed in December 2020 provided continued assistance at $300 per week as supplemental to existing benefits.

In March 2021, the Biden Administration signed the American Rescue Act of 2021, which extended the $300 per week benefit until September 6, 2021. 

This new Act also outlined that taxpayers with an adjusted gross income of up to $150,000 don’t have to pay taxes on up to $10,200 of benefits received. However, anything received after that amount is considered taxable income on a tax return. 

Important note: if you paid your taxes before this law was implemented, you can file an amended tax return to reflect the change.

You may also have to pay a state tax. There are a few states that specifically don’t tax unemployment benefits, which are:

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

If you live in a state that doesn’t tax income at all, you also won’t have to pay income tax on unemployment:

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

All other states will tax these benefits, however. 

How to pay taxes on unemployment

If you received unemployment, you’ll get IRS Form 1099-G from the government, which indicates the exact amount received in a calendar year. Even if you don’t receive this form for whatever reason, you still need to report all income over the $10,200 amount on your tax return. 

Note that this compensation isn’t subject to FICA taxes. This includes Social Security and Medicare taxes that an employer withholds from paychecks. 

Keep in mind that the extra funds provided under the CARES Act and following legislation — the additional $600 per week and $300 per week — are also taxable after that initial $10,200. 

What if you can’t afford unemployment taxes?

When the tax deadline is approaching, you may realize that you haven’t saved enough and you just don’t have the money to pay. If this is the case, the IRS does provide options. 

If you owe $50,000 or less, you can file Form 9465, which requests an installment agreement. You’ll pay a set amount each month over up to 72 months to pay off the amount of tax owed. Just remember that you will have to pay interest and a late payment penalty on any tax owed that isn’t paid by the due date, even if the IRS grants an installment agreement. 

It’s important to do everything you can to pay your taxes on time to avoid overpaying with fees and penalties. Remember that you can’t simply decide not to file your tax return—it’s the law, and not doing it will become expensive fast. 

The team at Provident CPA & Business Advisors helps business owners develop strategies for success while paying the least amount of tax legally possible. Contact us to learn more.