Do I Have to Pay Taxes on My Unemployment Benefits?

 

Since the money is coming from the government to start with, many people ask, “Do I have to pay taxes on my unemployment benefits?”

In today’s article, I’ll answer that question and respond to the most frequently asked questions regarding taxes and unemployment benefits.

Do I have to pay taxes on my unemployment benefits?

The short answer is yes, you have to pay federal income taxes on your unemployment benefits. Your unemployment benefits are included in your income with any wages you received throughout the year. Those wages and benefits are then taxed according to your tax bracket.

You may remember that in 2020, the American Rescue Plan Act allowed individuals with a modified adjusted gross income of less than $150,000 to exclude up to $10,200 of unemployment benefits from their taxed wages. If you were wondering, this only applies to tax year 2020.

When do I pay taxes on my unemployment benefits?

America’s income tax system is a pay-as-you-go system, which means your taxes are actually due when you receive your wages or benefits. When you receive wages from an employer, your income taxes are withheld from your check each pay period. Since income taxes aren’t automatically withheld from your unemployment benefit checks, you are required to pay those taxes in one of three ways:

  1. Request to have your federal income taxes withheld from your benefit check.
  2. Make quarterly estimated tax payments.
  3. Pay the taxes by the tax deadline–usually April 15 of the following year. (Note: This option may cost you a penalty amount.)

How do I request to have my federal income taxes withheld from my unemployment benefits checks?

First of all, you should know that when you make this request, the government will withhold 10% of each of your unemployment checks to pay your federal income taxes. You cannot change this percentage for unemployment benefit withholding. This is an option that will likely be given to you when you first apply for unemployment benefits.

If you missed making this request when you first applied for unemployment benefits, or if you change your mind later on, you can complete Form W-4V and give it to the agency providing your benefits. Some agencies may have a different withholding form as well, so you’ll want to check with them to make sure they have what they need from you.

One word of caution: It is possible that even though you have withholding set up, it may not cover your total tax bill. If this is the case, and you wind up owing more than $1,000, you may have to pay an underpayment penalty. The way to avoid that would be to make estimated quarterly tax payments–which I’ll discuss later in this post–in addition to the 10% withholding. If you’re not sure if this will apply to you, use the worksheet on Form 1040-ES or use my free quarterly tax payment calculator.

How do I make quarterly estimated tax payments?

There are two main ways to make your quarterly estimated tax payments to the IRS. You can complete Form 1040-ES and mail that in with your check, or you can submit your payment online through the IRS’ payment portal.

When are quarterly estimated tax payments due?

Quarterly tax payments are usually due by the 15th of the month that follows the end of the quarter. For 2022, these are the quarterly payment due dates for the IRS:

Quarter Dates Due Date
1 January 1 – March 31 April 18
2 April 1 – May 31 June 15
3 June 1 – August 31 September 15
4 September 1 – December 31 January 17, 2023

Caution: If you live in a state where you need to pay quarterly taxes to the state as well, the state’s dates might not be the same as the federal dates. Make sure you check those out.

What happens if I wait until the yearly tax deadline to pay all of my taxes on my unemployment benefits?

If you don’t want to have federal income taxes withheld from your benefit checks and you don’t want to mess with quarterly estimated payments, you can hold off and pay your full tax bill when it’s due (typically by April 15). Just know that you may be charged an underpayment penalty for this.

Additionally, you can ask the IRS to waive the underpayment penalty if you didn’t make payments because of a “casualty event, disaster, or other unusual circumstance” or you retired or became disabled during the preceding tax year. If you qualify to waive the underpayment penalty, you can complete and submit Form 2210 when filing your tax return.

How much will I have to pay for an underpayment penalty if I don’t pay federal income taxes throughout the year on my unemployment benefits?

The underpayment penalty is a tricky number to calculate because it varies based on how much you owe, when you should have paid, and the interest rate at the time that you owed the taxes. You can use the worksheet on Form 2210 to help you figure out your penalty amount.

For those just wanting a roundabout idea of what you might owe if you need to go this route, here’s a rough example:

Let’s say you underpaid your taxes by $2,000 in 2022. The IRS has determined that the rate used to calculate your penalty is 5% (the federal short-term rate for the third quarter of 2022 plus 3 percentage points). Since 5% of $2,000 is $100, that is the amount of your penalty. You’ll add that $100 to the $2,000 you underpaid in taxes and send that to the IRS.

Do I have to pay state taxes on my unemployment benefits?

Maybe. Some states either don’t have a state income tax or don’t tax unemployment benefits (woot!), but many states do. Additionally, the individual income tax varies by state, so you’ll need to check with your state’s department of revenue to find those numbers and information about how to pay. You’ll also want to ask your local unemployment office if there are any other local taxes that apply to your benefits.

If you live in any of the following states, you’ll need to pay state income taxes on your unemployment benefits:

  • Alabama
  • Arizona
  • Arkansas
  • Colorado
  • Connecticut
  • Delaware
  • District of Columbia
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana (partial)
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • Nebraska
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Carolina
  • Utah
  • Vermont
  • West Virginia
  • Wisconsin (partial)

To sum it all up, when it comes to taxes and unemployment benefits, you’ll definitely need to pay federal income taxes on your benefits, but you may avoid paying state income taxes on those benefits depending on where you live. You also have choices when it comes to when and how to pay, so it’s important to figure that all out at the onset so you don’t have any tax bills or penalties that creep up on you. If you’re not sure what to do or have other tax-related questions, don’t be afraid to consult a CPA you can trust.

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Amy Northard, CPA

The Accountant for Creatives®
+ taxes + bookkeeping + consulting
+ Hang out with me over on Instagram!

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