Yes, unemployment income is taxable.
The pandemic had the perfect storm – a public health disaster with far-reaching economic effects. Thousands of Americans were laid off, and ended up on unemployment benefits to help their families through challenging times. This was the first time that many of these individuals experienced the effects of unemployment income on their taxes. This created new situations at tax time in 2020 and beyond.
Now that 2023 is here, many of the special tax treatments, including special treatment for unemployment income, that were available during the pandemic are expiring or have expired. However, if you are filing back taxes for previous years, you still may be eligible to claim some of these tax breaks.
In late 2022 and early 2023, thousands of workers at tech giants like Amazon and Meta have been laid off. Some of these workers will end up on unemployment as well. Though the pandemic has faded into the background, the need for unemployment income has not gone away. If you are among the tech workers affected by the recent layoffs, you will also need to know how any unemployment compensation you receive will affect you, both this tax season and next.
Federal Tax Considerations
Unemployment income is generally taxed at the federal level. It is counted in your total income for the year along with other earned income from other sources.
How do I report unemployment income?
If you received unemployment income in 2022, you will receive a 1099-G “Certain Government Payments” that reports your unemployment income received. You will include this with your other 1099’s and W-2s for income for that year. When you fill out your tax return, or bring it to a tax preparer, your unemployment income will be entered with all your other income amounts.
Will my unemployment check raise my tax bill this year?
It might. If you are filing taxes for 2020 and have a total income of less than $150,000, you will be able to exclude up to $10,200 of unemployment income from your taxable income. For all other years, unemployment income is included in taxable income just the same as any other income source. Higher income usually means a higher tax liability, unless you had other taxable events for the year that led to deductions and credits to offset the higher income.
For example, if you had unemployment income in 2022 but also went back to school to improve your skills, you may qualify for the Lifetime Learning Credit, which can offset some of your tax liability for the year. If you have concerns about the exact tax consequences of your taxable events for the year, consult with an accountant or tax professional. Brigit has partnerships with several tax companies—head to the Earn & Save section of the Brigit app to find one that works for you.
State Tax Considerations
Most states include unemployment income in taxable income just as the federal government does. In this case, the unemployment income would be subject to the same state tax rate as the rest of your income.
There are a few states that have unique provisions that affect state unemployment income. First, there are some states that do not have any income tax at all. These states include Alaska, Nevada, Florida, South Dakota, Texas, Washington, and Wyoming. If you live in one of these states, you will pay the usual federal taxes on your income, but will not pay any income tax to the state.
There are also some states that do have an income tax, but allow taxpayers to exclude unemployment benefits from their taxable income. These states are Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia. If you live in one of these states, you will pay federal and state income taxes, but not on your unemployment benefits. Your unemployment benefits will not raise your tax liability.
Unemployment Tax FAQS
FAQ: Is tax withheld from my unemployment benefits?
Tax is not withheld automatically from your unemployment benefits. This means that you could owe more taxes on your unemployment benefits when you file than on your W-2 earnings. W-2 earnings have some of your earnings withheld for estimated tax payments throughout the year, and you usually get some or all of this money back as a refund. Since unemployment benefits do not have this automatic withholding, you may have tax due on this money. If you want to have tax withheld from your unemployment, contact your state Department of Labor.
FAQ: What about COVID-19 economic stimulus payments?
People who received both unemployment and stimulus checks during the pandemic may have confused the two.
- The stimulus checks were a special pandemic emergency payment, and were not taxable as income.
- Unemployment is a continuing program for eligible workers, and is taxable as income.
Unemployment is also usually a joint program between the federal government and state governments, while the stimulus payments were a purely federal program. A few states, such as Maine, had their own state stimulus checks, and these were not taxable as state or federal income either.
FAQ: What if I can’t pay the taxes I owe?
Unemployment throws people into a very difficult position. The financial uncertainty of unemployment, the need to dip into savings, and the search for a new job often drives thoughts of tax consequences out of people’s minds. If you owe taxes on unemployment income and you are unable to pay, it is still important to file your taxes accurately and on time. This saves you fines and penalties for failure to file your taxes. The IRS allows you to set up payment plans for unpaid taxes, as long as you demonstrate a good-faith effort to pay the tax owed and have a plan to pay off the tax within three years. You will still accumulate penalties and interest on the unpaid balance, but it will be much less than if you did not file at all. Here’s a guide that will help you navigate what to do if you can’t pay your taxes.
FAQ: I didn’t withhold taxes from my unemployment income. How can I reduce my tax bill?
It depends on your individual circumstances. If your total income is low enough, and especially if you have children, you may qualify for low-income tax credits such as the Earned Income Credit (see more tax deductions here). If you can manage to put some money into a 401(k) or IRA before the end of the year, you may also qualify for the Saver’s Credit. If you used your unemployed time to build a side hustle or a self-employed business, you may find deductions that you can claim against your self-employment income to reduce your taxable income.
We hope this guide helps you navigate dealing with the tax consequences of receiving unemployment, and reporting it properly. Unemployment funds are an excellent resource for struggling Americans, but it is important to be aware of the potential tax consequences.