Although there was a pandemic exception for tax year 2020, receiving unemployment benefits is normally similar to earning a paycheck when it comes to income taxes. Unemployment income is considered taxable income for the tax year and must be reported on your tax return.
Here’s what to know about paying taxes on unemployment benefits in tax year 2022, the return you’ll file in 2023.
- You'll need to report and pay federal taxes on unemployment benefits.
- You'll receive a 1099-G, which will provide you with the information you need to include on your tax return.
- You can withhold 10% of your unemployment benefits to pay federal taxes.
- Some states that have income taxes do not treat unemployment compensation as taxable income.
What Are Unemployment Benefits?
The term unemployment benefits includes many types of unemployment compensation and unemployment income. It includes unemployment insurance benefits paid to you by your state, disability benefits paid in lieu of unemployment compensation, and railroad unemployment compensation benefits. It also includes any payments made to you by the Federal Unemployment Trust Fund and Federal Pandemic Unemployment Compensation.
How Taxes on Unemployment Benefits Work in 2022
You should receive a Form 1099-G from your state or the payor of your unemployment benefits early in 2023 for the unemployment income you received in 2022. The full amount of your benefits should appear in box 1 of the form. The IRS will receive a copy of your Form 1099-G as well, so it will know how much you received. You don’t have to include the form when you file your federal return.
Unemployment benefits aren’t subject to Medicare or Social Security taxes, only income tax. This may help reduce your overall tax burden in the year you claim them.
When you’re ready to file your tax return for 2022, write the amount stated in box 1 of your Form 1099-G on line 7 of Schedule 1, Additional Income and Adjustments to Income. You must file Schedule 1 with your Form 1040 or 1040-SR tax return. Line 7 is clearly labeled, “Unemployment compensation.” The total amount from the Additional Income section of Schedule 1, line 10, is then entered on line 8 of your tax return.
You must report your unemployment benefits on your tax return even if you don’t receive a Form 1099-G. Go to your state’s website if you didn't receive one and think you should have—some states may not mail out paper versions of the form. The form is usually available electronically, but you can also call your state unemployment office.
Report it to the paying authority as soon as possible if you receive a Form 1099-G but did not collect unemployment benefits in 2022. This is a signal that you may be a victim of identity theft. Notify the IRS as well so the agency can also report it and investigate.
When it went into effect on March 11, 2021, the American Rescue Plan Act (ARPA) gave a tax break on up to $10,200 in unemployment benefits collected in tax year 2020. You had to qualify for the exclusion with a modified adjusted gross income (MAGI) of less than $150,000. The $150,000 limit included benefits plus any other sources of income. You claimed the exclusion when filing your 2020 tax return in the spring of 2021.
How to Prepare for Your 2022 Tax Bill
You can have income tax withheld from your unemployment benefits, so you don’t have to pay it all at once when you file your tax return—but it won’t happen automatically. You must complete and submit Form W-4V to the authority paying your benefits. Withheld amounts appear in box 4 of your Form 1099-G.
You can have federal taxes withheld from your benefits, but it is limited to 10% of each payment. This may not be enough to adequately cover taxes on the benefits you received. If you’ve returned to work, you can opt to have extra tax withheld from your paychecks through the end of the year to help cover taxes owed on your unemployment benefits as well as your regular pay.
Your other option is to make advance estimated quarterly payments of any tax you think you might owe on your benefits. You have until Jan. 15 to make estimated tax payments on any benefits you receive between September and December of the prior tax year. In fact, you must do so if sufficient tax wasn’t withheld from your unemployment benefit payments. You could be charged a tax penalty if you don’t “pay as you go” through either additional withholding or estimated payments during the tax year.
The tax you owe on your unemployment benefits might be minimal, depending on how much you received. This is because unemployment doesn't replace 100% of your previously earned compensation.
If you don't have taxes withheld from your unemployment benefits and you fail to make estimated payments, you’ll have to pay any lump sums and penalties by tax day (usually April 15), when your tax return is due.
If You Can't Afford to Pay Your Taxes
If you’re receiving unemployment benefits and don't withhold federal income tax or make estimated payments, you might end up with a larger amount due in taxes than you anticipated. This could create a financial hardship for you because you've likely lost some income already due to being unemployed.
For some taxpayers, this could mean deciding between paying the rent and buying groceries, or sending estimated tax payments to the IRS. If you find yourself in this situation, the IRS does provide you with options.
You can apply for a short-term or long-term installment agreement with the IRS to satisfy your tax debt in monthly payments. You can apply online, or you can apply by phone or mail by filing Form 9465 with the IRS. Form 9465 helps you determine the amount the IRS would like you to pay over a term of 72 months. However, it allows you to select lesser payments if you can justify on Form 433-F why you cannot make the payment determined on Form 9465.
Even with a payment plan, you'll still have to pay any penalties, fees, or interest you incur from paying your taxes late.
You can also ask the IRS to waive any underpayment penalty that’s been assessed against you if you feel it would be inequitable to require you to pay the penalty. You might also qualify for a waiver if you became disabled during the year you collected unemployment or retired during that year and were at least 62 years old.
State Income Taxes on Unemployment Benefits
Many states tax unemployment benefits, too. There are several that do not. If your state does tax unemployment benefits, you may want to see if you can withhold state income taxes from your unemployment compensation.
Seven states don’t tax any income at all, so you’ll be spared if you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming. New Hampshire doesn’t tax regular income; it only taxes investment income.
Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia do have income taxes, but those states won't tax your unemployment benefits as income.
Frequently Asked Questions (FAQs)
How much tax is taken out of unemployment compensation?
You can choose whether or not to withhold federal taxes at a rate of 10% if you collect unemployment benefits. Some states may allow you to withhold 5% for state taxes. You may have to pay estimated quarterly payments or pay taxes when you file your annual tax return if you don't have taxes taken out of your unemployment checks. Either way, your unemployment income is considered taxable income, just like any other wages or salaries you receive.
What happens to the amount of tax money the government collects if unemployment is high?
A period of high unemployment may reduce the amount of money the government collects in taxes. Of course, national taxation is a complex system that's always subject to political and economic changes. It could potentially increase taxes the next tax year to make up for the shortfall if a government doesn't collect enough revenue from taxes.
Who pays unemployment taxes?
Taxes on unemployment income are paid by the person receiving the benefits. But "unemployment taxes" can also refer to taxes imposed by the Federal Unemployment Tax Act (FUTA). FUTA taxes are paid by employers.