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Many people who lose their jobs are surprised to learn that unemployment benefits are considered taxable income. If you didn’t have taxes withheld from your benefit check, you could find yourself owing money when you file your return.
Wondering how unemployment will affect your taxes? Don’t panic. We’ll explain how unemployment benefits are taxed and what to do if you can’t afford to pay. You’ll also learn about tax credits you may be eligible for if you collect unemployment and how to avoid an unexpected tax bill.
How unemployment benefits are taxed
Unemployment benefits are subject to federal income taxes. Depending on where you live, you could owe state and local taxes as well.
Federal income taxes
Unemployment benefits are generally considered taxable income and must be reported to the Internal Revenue Service. The tax rate you pay is determined by what tax brackets you fall into based on all your income sources — not just unemployment benefits but also any money you earned if you worked during the year.
Tax withholding on unemployment benefits is voluntary. You can ask your state unemployment office to withhold a flat 10% for federal income taxes by filling out IRS Form W-4V, Voluntary Withholding Request. If your state has its own withholding form, use that form instead.
Be aware, though, that the 10% withholding may not cover your full tax liability, particularly if you had other sources of income. To avoid a large bill on tax day, you can also make quarterly estimated tax payments, which are typically made by freelancers and self-employed people.
If you don’t pay taxes on unemployment income throughout the year, you could face an underpayment penalty when you file.
You should receive tax Form 1099-G, which shows how much unemployment insurance you received, as well as any taxes withheld. Some states mail the form, while other states require recipients to get the electronic version from their websites.
Though you’ll owe federal income tax on unemployment benefits, you won’t have to pay Social Security or Medicare taxes (known as payroll taxes) on your benefits.
Note that if you previously received unemployment benefits during the pandemic, the rules have changed. The American Rescue Plan Act of 2021 allowed individual taxpayers with an adjusted gross income (AGI) of less than $150,000 to exclude up to $10,200 of jobless benefits from their incomes for the 2020 tax year. But this rule applied only to 2020. If you received unemployment for any subsequent year, you’ll need to include the full amount of your compensation as taxable income.
For a comprehensive look at the rules on federal income taxes and unemployment, visit the IRS unemployment compensation page.
State income taxes
Most states levy income taxes and require unemployment recipients to pay state taxes on their benefits. There are some exceptions, though.
If you live in one of these nine states, you won’t pay taxes at the state level on your unemployment because these states have no income taxes, or they only tax interest and investment income:
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Alaska
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Florida
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Nevada
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New Hampshire*
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South Dakota
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Tennessee*
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Texas
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Washington
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Wyoming
*These states have an income tax that applies only to interest and investment income.
The following six states shield unemployment compensation from taxable income:
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Alabama
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California
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Montana
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New Jersey
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Pennsylvania
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Virginia
Additionally, residents of Indiana and Wisconsin may be eligible to deduct or exclude part of their unemployment benefits for tax purposes on their state return.
In the remaining 33 states, you should prepare to pay state taxes on your unemployment. Visit your state’s Department of Revenue website to find out what state and local taxes apply.
Tip: If you need help with tax preparation, visit the IRS Free Tax Prep Help search tool to find an IRS Volunteer Income Tax Assistance (VITA) program or Tax Counseling for the Elderly (TCE) program near you.
Tax credits you may be eligible for if you received unemployment
Tax credits can offset the amount of your tax bill dollar for dollar. If the credit is refundable and a credit exceeds what you owe, the IRS will issue the extra amount to you as a tax refund. If it’s nonrefundable, you can use the credit to reduce your tax liability, but you won’t receive a refund for any excess amount.
Here are some tax credits you might qualify for if you receive unemployment.
Earned income tax credit
The earned income tax credit (EITC) is a tax credit for working people who have low to moderate incomes. As the name says, you need to earn income to qualify.
Unemployment compensation doesn’t count as earned income for this credit. But if you worked part of the year and then lost your job, you may qualify. In fact, you could find yourself eligible for EITC, even if you didn’t qualify in the past, if your income is substantially lower for 2023 than previous years.
The maximum credit ranges from $600 for taxpayers with no dependent children to $7,430 for families with three or more qualifying children. Income restrictions vary based on household size and tax filing status. For example, someone who’s single with no qualifying dependents can only receive the full credit if their adjusted gross income (AGI) was $17,640, whereas a married couple filing jointly with three dependents could receive the maximum credit with an AGI of $63,398.
Child tax credit
If you have dependent children who were 16 or younger at the end of 2023, you can receive the child tax credit on their behalf, even if you didn’t work during the year. The child tax credit is worth up to $2,000 per qualifying child. You can qualify for the full credit if you’re a single taxpayer with an AGI of $200,000 or less, or if you’re married filing jointly with an AGI of $400,000 or less.
The credit has a refundable portion of up to $1,600 that’s known as the additional child tax credit. But in order to qualify for the refundable part of the credit, you’ll need at least $2,500 in earned income unless you have three or more qualifying children.
Child and dependent care credit
If you earned income from working during the year and you paid for childcare so you could either work or search for work, you could qualify for the child and dependent care credit. The credit is available if your child was younger than 13 when you paid for their care. The credit is also available to families who paid for the care of a dependent who’s physically or mentally unable to care for themselves, even if they’re 13 or older.
The credit is worth between 20% and 35% of child care expenses, depending on income level. The maximum credit is $3,000 for one dependent, or $6,000 for two or more dependents. The credit is nonrefundable.
Saver’s credit
If you worked at some point during the year and contributed to a retirement account, you may be eligible for the saver’s credit. The credit is meant to encourage lower- and middle-income taxpayers to save for retirement.
The maximum credit is 50% of your retirement contribution, up to $2,000 for single taxpayers or $4,000 for married couples filing jointly. You could be eligible for the full credit at AGIs of less than:
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$21,750 (single filers)
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$32,625 (heads of household)
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$43,500 (married filing jointly)
If your income was above these amounts, you may qualify for a smaller credit. You’re ineligible for the savers credit if your AGI exceeds:
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$36,500 (single filers)
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$54,750 (heads of household)
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$73,000 (married filing jointly)
For example, suppose you’re a single filer who earned $20,000 before getting laid off six months into the year. You contributed 10% of your salary, or $2,000 total, to your 401(k). You’d be eligible for a credit of $1,000, or 50% of your $2,000 contribution.
The saver’s credit is nonrefundable. That means that it can lower your tax bill, but you won’t receive any excess amount as a tax refund.
What if you can’t afford taxes on unemployment?
Even if you can’t afford your taxes, you’ll still want to file your taxes or request an extension by April 15, 2024. Failure to file penalties is much steeper than failure to pay penalties, so you don’t want to miss the filing deadline. If you owe money, you’ll probably have the option of an IRS payment plan. Most taxpayers who owe less than $50,000 can set up an installment plan online and make monthly payments for up to 72 months.
If you’re still collecting benefits, consider asking your state unemployment agency to withhold 10% for federal taxes. Finding extra room in your budget can be challenging when you’re not collecting a paycheck. But if you can have money withheld and still stay afloat, next year’s tax season will be less stressful.
Read more: Don’t spend extra just to file your taxes. Here are 7 free tax filing options
Frequently asked questions (FAQs)
Can you get a tax refund on unemployment?
You can get a tax refund if you’re on unemployment if you paid more than you owed in taxes over the year. Qualifying for refundable tax credits can help you get money back at tax time.
Does unemployment count toward AGI?
Yes, unemployment counts toward your AGI, or adjusted gross income. You’ll need to report it on Schedule 1 of your federal tax return under the “additional income” section, then carry over the amount you received onto Form 1040.
Is there a tax credit for people who lose their jobs?
There’s no tax credit or deduction specifically for people who have lost their jobs. However, if your income is lower as a result of losing your job, you could qualify for tax credits like the earned income tax credit if you earned money through working at some point in the year. Such credits can lower the total amount you owe in taxes and could even result in a refund, depending on the tax credit.