Unemployment benefits are taxable income, and withholding from them directly affects what you owe at tax time

When you receive unemployment benefits, the federal government treats them as taxable income. You can choose to have taxes withheld from your unemployment payments — usually 10 percent federal income tax — or you can receive the full amount and pay taxes when you file your return. Whichever path you take changes how much you owe or how much you get back.

If you had taxes withheld from your unemployment checks, that money goes toward your total tax bill for the year. When you file your return, the IRS compares what you withheld against what you actually owe. If you withheld more than you owe, you get a refund. If you withheld less, you owe the difference. If you did not have taxes withheld at all, your entire unemployment total becomes part of your taxable income, which usually means a larger bill or a smaller refund than if you had withheld.

Key Takeaways

  • Unemployment benefits count as taxable income, and you can choose whether to have 10 percent federal withholding taken from each payment.
  • Money withheld from unemployment reduces your tax bill dollar-for-dollar, just like withholding from a paycheck does.
  • If you did not have taxes withheld from unemployment, your refund will be smaller or you will owe money, because the full benefit amount is added to your taxable income.
  • You can change your withholding choice at any time during the year by contacting your state unemployment office.
  • The IRS Form 1040 line for unemployment income shows your total benefits; Schedule 1 shows any taxable portion you must exclude.

How withholding from unemployment works

When you file a claim for unemployment benefits, your state unemployment office asks whether you want federal income tax withheld. If you say yes, they deduct 10 percent from each weekly or biweekly payment and send it to the IRS on your behalf. That 10 percent is not negotiable — you cannot choose a different rate.

This withholding is purely voluntary. You can decline it entirely, and many people do, especially if they expect to owe little or no tax for the year. The trade-off is straightforward: withholding now means less money in your pocket each week, but it also means less to pay or owe when you file. No withholding means more cash now, but a larger tax bill later.

The withholding amount appears on your state unemployment statement and on Form 1099-G, which you receive by January 31 of the following year. This form shows your total unemployment benefits and the federal tax already withheld.

What happens to your refund if you withheld taxes

If you had 10 percent withheld from your unemployment benefits, that money is credited against your total federal income tax liability for the year. When you file your return, the IRS adds up everything you owe based on your income, filing status, and deductions. Then it subtracts all the tax you already paid — including the withholding from unemployment.

If your withholding exceeds what you owe, you get a refund. If your withholding falls short, you owe the difference. The size of your refund depends on your total income, not just unemployment. For example, if you earned $15,000 in wages, received $8,000 in unemployment with $800 withheld, and your total tax liability is $1,200, you would owe $400 more. If your liability is only $600, you would get a $200 refund.

What happens to your refund if you did not withhold

If you chose not to have taxes withheld from unemployment, the entire benefit amount becomes taxable income on your return. This usually increases your tax bill or reduces your refund compared to a scenario where you withheld.

The IRS requires you to report all unemployment income on Form 1040, line 5. If you received more than $150 in unemployment, you must also complete Schedule 1 and attach it to your return. The full amount you received is added to your other income to calculate what you owe.

For many people, not withholding means a surprise bill at tax time. If you were living on unemployment alone and had no other income, you might owe several hundred dollars. If you also worked during the year, the combined income could push you into a higher tax bracket, making the bill even larger.

The American Rescue Plan exclusion and how it affects withholding

In 2021, the American Rescue Plan allowed people to exclude up to $10,200 of unemployment benefits from taxable income if their modified adjusted gross income was below $150,000. This was a one-time provision for the 2020 tax year only.

If you received unemployment in 2020 and had taxes withheld, you may have been able to claim a refund of that withholding on the excluded portion when you filed your 2020 return. The IRS issued guidance allowing people to either file an amended return or wait for the IRS to process the refund automatically. This exclusion does not explore to unemployment received in 2021 or later years.

Changing your withholding mid-year

You are not locked into your withholding choice for the entire year. If you started receiving unemployment without withholding and realize you will owe a large bill, you can contact your state unemployment office and request that withholding begin. Similarly, if you had withholding and need more cash flow, you can request that it stop.

The change takes effect on your next payment. There is no penalty for changing your mind, and you can change it as many times as you need to. Keep in mind that if you switch to withholding late in the year, you may not withhold enough to cover your full tax liability, so you could still owe at tax time.

How to report unemployment on your tax return

Unemployment income goes on Form 1040, the main federal income tax form. Line 5 is labeled "Unemployment compensation" — this is where you enter your total benefits from Form 1099-G, box 1a.

If you received more than $150 in unemployment, you must also complete Schedule 1 (Additional Income and Adjustments to Income) and attach it to your return. On Schedule 1, line 7, you report the same unemployment total. The form then calculates any taxable portion and carries it forward to your main return.

Form 1099-G shows both your total benefits and the federal tax withheld. The withheld amount appears in box 4. When you file, the IRS matches this form to your return automatically, so make sure the amounts match what you received.

Frequently Asked Questions

If I had taxes withheld from unemployment, will I definitely get a refund?

Not necessarily. Whether you get a refund depends on your total tax liability for the year, not just the withholding from unemployment. If your other income and tax situation mean you owe more in total tax than you withheld, you will owe money instead of getting a refund. Withholding only guarantees that some tax was already paid.

Can I choose a withholding rate other than 10 percent?

No. Federal law sets unemployment withholding at a flat 10 percent if you choose to withhold. You cannot request 15 percent or 5 percent. Your only choices are to withhold 10 percent or not withhold at all. Some states offer additional state income tax withholding, which varies by state.

What if I did not withhold and cannot pay the tax bill when I file?

The IRS offers payment plans for people who owe but cannot pay in full. You can request a short-term extension (up to 180 days) or a long-term installment agreement. Both have fees and interest charges. Filing your return on time, even if you cannot pay, reduces penalties. Contact the IRS or a tax professional to discuss your options.

Do I need to report unemployment if I received less than $150?

Yes. All unemployment income is taxable and must be reported on your return, regardless of the amount. However, you only need to file Schedule 1 if you received more than $150. The income still goes on Form 1040, line 5.

If I amend my return, can I claim a refund of withholding I already paid?

Yes. If you discover you withheld more than necessary, you can file Form 1040-X (Amended U.S. Individual Income Tax Return) to claim the overpayment as a refund or credit toward future taxes. The IRS typically processes amended returns within 16 weeks, though it can take longer if there are questions.