Does unemployment is taxed or not?

Have you become an unemployed person since the beginning of the COVID-19 outbreak? If yes, you’re likely to have some questions related to this issue! Here, we provided you with some key questions and answers that you may find helpful. 

The first general question Is whether unemployment is taxed or not

 In brief, yes, unemployment earnings are taxed. However, paying taxes and understanding how getting unemployed influences your tax return, requires a bit more explanation – especially if you want to avoid undesirable surprises at tax season. let’s make it more clear. Unemployment is taxed for all recipients at the federal level. How much you pay depends on the tax bracket in which you’re in, and how much taxable income you have. With regard to state taxes, it very much depends. You won’t need to worry about paying state taxes on your unemployment income if you’re living in one of the states with no income tax. For other states, the treatment of unemployment income differs from state to state. For instance, in California unemployment benefits are exempt from state taxes, but unemployment is taxed in Michigan. Moreover, If you are wondering about the additional $600 of federal unemployment benefits from the CARES Act as well, yes, this income is taxable just like your state benefits.  

 The second question is this:

Do you pay income tax on unemployment? How and when?

When you receive wages from a job, you pay taxes as you go through wage withholdings. Information you give your employer on Form W-4 declares your employer how much to withhold. In other words, you’re paying your taxes little by little with each paycheck. You have the same option with unemployment income, but it’s not applied by itself. If you select to withhold federal taxes, the percentage is set at 10%. Depending on the situation, that amount might not cover all your taxes, but at least you do pay some income tax on unemployment as you go.  

So, what is the option if you don’t set up withholding to start?      Continuing to draw unemployment, you are able to commence withholding taxes by completing Form W-4V and submitting it to the state unemployment office.


The other question is, does getting unemployed affect your tax return?

One more time, the answer is yes, getting unemployment will have an impact on your tax return. How it affects you depends on the situation. The ways, unemployment income can affect your taxes are as follows:

  • Taxes due/your refund – Paying taxes through withholding, will reduce what you owe at tax time and reduce the possibility of an underpayment penalty. If you haven’t paid enough in taxes, you may end up owing taxes when you file your return. If you’ve paid too much during the year, you’ll get money back as a tax refund.
  • Forms you receive – having unemployment income, the state will send you Form 1099-G at the end of January. It will be used in order to complete the tax return.
  • Tax credits eligibility – If your total income is lower as you collect unemployment income, it may affect the eligibility for certain credits or affect how much credit you are able to receive. For instance, you probably now qualify for the Earned Income Credit or be able to receive more (or less) of it.
  • Furthermore, if you’ve lost your job, you would probably be able to buy health insurance via the Health Insurance Marketplace. Depending on the income level you may be eligible for the Premium Tax Credit.
  • In case of repaying some of your unemployment benefits, it can offset what you’ve received. If you repay it the next year, you won’t be able to take a tax benefit unless your future year repayment is more than $3,000. To clarify it, take Daniel as an example, he received $1,500 in unemployment income this year but paid back $1,000 before the end of the year. When he files, he’ll only need to pay taxes on the remaining $500 of his unemployment income.

Does unemployment is taxed or not?