How Collecting Unemployment Can Impact Your Taxes

The following is provided for informational purposes.

Unemployment benefits exist to help individuals and families weather difficult times. If you need to access your unemployment benefits, you're probably just focused on the immediate problems you're trying to solve: keeping the lights on and food on the table. Come tax time, however, you may be surprised by the way those benefits cost you later. 

That's because while you may have paid into the unemployment fund while you were working, the money you’re receiving isn’t tax-free. Figuring out how much you may need to pay and preparing ahead of time could help you avoid getting caught off guard.

You may have to pay income taxes on unemployment

Unemployment is treated the same as your regular earnings and gets added to your overall taxable income to determine your federal income taxes for the year. But unlike your wages, you don’t have to pay Social Security or Medicare taxes (FICA taxes) on unemployment.

How much you pay will depend on your total taxable income and the tax brackets for the year. For example, if you file your tax return using the single status (i.e., aren’t married and don’t have any dependents) and make $11,001 to $44,725 after deductions in 2023, then you’ll pay a 12% income tax on your unemployment.

As is always the case, moving into a higher tax bracket won’t increase how much income taxes you pay on all your income. It only impacts the money you earn that’s within that bracket. Even if you make $100,000, you still only pay 12% income taxes on the money that’s in the $11,001 to $44,725 range.

Your unemployment benefits could also be taxable at the state level. However, in addition to the states that don’t have any income taxes, California, New Jersey, Oregon, Pennsylvania, and Virginia don’t tax unemployment income.

Your unemployment gets reported to the IRS

Similar to how you receive a W-2 from your employers each year, your state will send you and the IRS a Form 1099-G with your total unemployment income for the year.

You can copy the numbers from this form when preparing your tax return. If you choose to have money withheld from your unemployment, that will also be recorded on the Form 1099-G. Your return could be flagged if you don’t include these numbers as the IRS gets a copy of the form and knows you received the money.

Three ways to deal with unemployment income taxes

While your unemployment income is taxable, you can decide whether to pay the taxes now or later. You could approach the situation in three ways:

• Have money withheld: You can ask your state to withhold money from your unemployment and send it to the IRS. This works similar to how employers withhold taxes from your paychecks.
• Make estimated tax payments: You could also proactively make estimated income tax payments to the IRS and your state (if necessary) online. Many freelancers and gig workers do this quarterly because income taxes aren’t withheld from their pay.
• Wait and pay later: You may want to choose to receive your full unemployment benefit without paying any taxes. While this will give you more money now—which may be necessary—it also means you’ll have to pay all the income taxes later.

There are pros and cons to each, and you’ll have to decide if it’s best to have less income now or pay more taxes later. However, you should also consider your overall financial situation before deciding.

For example, if you make less than the standard deduction for the year, you might not have to file a tax return or pay income taxes at all. For 2023, the standard deduction is $13,850 if you file as single or married filing separately, $27,700 if you file a joint return with your spouse, and $20,800 if you have a dependent and file using heads of household.

If you make less than that amount, you won’t owe any federal income taxes. But if you have income withheld or make estimated tax payments, you’ll have to file a return to get that money back.

Review your budget to prepare

Whether you regularly budget or are new to the concept, you may want to revisit your financial plan when you start to collect unemployment. Reviewing or creating a budget could help you find ways to save money, and it allows you to make an informed decision about if, when, and how much you want to set aside from your unemployment income for taxes.

If you’re looking for guidance or an expert’s opinion, MMI offers free financial counseling. Available 24/7, online and over the phone, it's a great way to get unbiased advice and support.