Unemployment reduces your refund because it counts as taxable income

Unemployment benefits are taxable income. When you receive them, you can choose to have taxes withheld from each payment, or you can pay the tax bill when you file your return. Most people do not have taxes withheld, which means they owe money at tax time instead of getting a refund — or their refund shrinks because the IRS applies it to what they owe.

The size of the reduction depends on your total income for the year, your filing status, and whether you had taxes withheld from your unemployment checks. If you earned wages before or after unemployment, or received other income, the combined total determines your tax bracket and how much you owe.

You can see how much unemployment you received on the Form 1099-G that your state labor department sends you by January 31. This is the document you use to report it on your tax return.

Key Takeaways

  • Unemployment benefits count as income and are subject to federal tax, so receiving them typically reduces or eliminates your refund.
  • You can request tax withholding on unemployment payments when you file your claim or anytime after, which reduces what you owe at tax time.
  • The Form 1099-G your state sends shows the total unemployment you received and any taxes already withheld.
  • If you did not have taxes withheld and owe money, the IRS will take it from any refund you would have received from other income sources.
  • Requesting withholding now prevents a larger bill or smaller refund next year if you are still receiving unemployment.

How unemployment income changes your tax calculation

Your refund or tax bill is based on your total income for the year minus deductions and credits. Unemployment is added to any wages you earned, self-employment income, interest, dividends, or other sources. The more income you have, the higher your tax bracket and the more you owe.

For example, if you earned $25,000 in wages and received $10,000 in unemployment, your taxable income is $35,000 (before deductions). You pay tax on the full $35,000, not just the wages. If you had $3,000 withheld from your wages but nothing from unemployment, you owe tax on $10,000 with no withholding to cover it. That $10,000 in unpaid tax reduces your refund or creates a bill.

The IRS does not treat unemployment differently from other income — it simply adds it to your total and calculates what you owe. If you would have received a $2,000 refund based on wages alone, but you owe $1,500 in tax on unemployment with no withholding, your refund drops to $500.

Requesting tax withholding on unemployment payments

You can have federal income tax withheld from your unemployment checks. Most states let you request this when you file your initial claim, and you can change your withholding choice anytime through your state's unemployment website or by contacting them directly.

The standard withholding rate is 10 percent of your weekly benefit amount. This is not a perfect match to what you will owe — it depends on your total income and filing status — but it reduces the surprise at tax time. If you are receiving $400 per week, 10 percent withholding is $40 per week, or about $160 per month.

To request withholding, log into your state unemployment account or call the number on your benefit statement. You will need to confirm your Social Security number and current address. The change usually takes effect within one to two weeks.

What happens if you did not have taxes withheld

If you received unemployment without tax withholding, you will owe federal income tax on it when you file your return. The IRS calculates what you owe based on your total income and your filing status.

If you are owed a refund from other sources — such as excess withholding from a job you held earlier in the year — the IRS will use that refund to pay your unemployment tax bill first. You receive only the amount left over, if any. For example, if you are owed a $1,200 refund but you owe $800 in tax on unemployment, you receive $400.

If you owe more than your refund, you have a tax bill due by April 15. You can pay it in full, set up a payment plan with the IRS, or request a short extension to file. The IRS charges interest and penalties on unpaid tax, so paying as soon as possible after you file reduces the total cost.

Reporting unemployment on your tax return

Your state labor department sends you a Form 1099-G by January 31 showing the total unemployment you received and any federal tax withheld. You report this on your federal tax return using Form 1040.

Line 19 of Form 1040 is where you enter your unemployment income. If you received a 1099-G, use the amount shown in Box 1a. If you had taxes withheld, that amount appears in Box 2, and you enter it on the line for federal income tax withheld.

If you did not receive a 1099-G by early February, contact your state unemployment office. You need this form to file accurately. If you file without it and the IRS receives it later, they may adjust your return and send you a bill for any additional tax owed.

State income tax and unemployment

Some states also tax unemployment benefits, and others do not. The states that do not tax unemployment are Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in any other state, you may owe state income tax on your unemployment as well as federal tax.

You can request state tax withholding at the same time you request federal withholding, or separately through your state's tax department. The process and withholding rate vary by state. Check your state's unemployment website or call their customer service line to find out whether you owe state tax and how to request withholding.

State tax withholding does not reduce your federal refund, but it does reduce your state refund or bill in the same way federal withholding does.

Planning ahead if you are still receiving unemployment

If you are currently receiving unemployment and expect to receive it again next year, requesting tax withholding now prevents a larger refund reduction or tax bill next year. The withholding does not change your total tax owed — it just spreads the payment across the year instead of requiring a lump sum at tax time.

If you are unsure whether to request withholding, consider your total household income. If you have a spouse who works, or if you have other income sources, you may owe more tax than the standard 10 percent withholding covers. In that case, you might request a higher withholding rate or plan to set aside money to pay the difference when you file.

If you are no longer receiving unemployment, you cannot change your withholding for the year it ended. You will report what you received and what was withheld on your tax return, and the IRS will calculate what you owe or what you are owed.

Frequently Asked Questions

Can I get my refund back if the IRS took it to pay unemployment taxes?

No. The IRS is legally required to use your refund to pay any federal tax you owe, including tax on unemployment. Once they apply it, you cannot reverse that decision. Your only option is to file an amended return if you believe the calculation was wrong, or to dispute the tax bill itself if you think you should not owe it.

What if I received unemployment but did not get a 1099-G?

Contact your state unemployment office and ask them to send it or provide the information you need to report. You are required to report unemployment income even if you do not receive the form. If you file without reporting it and the IRS finds out, they will bill you for the unpaid tax plus interest and penalties.

Does requesting tax withholding mean I will not owe anything at tax time?

Not necessarily. The 10 percent standard withholding is an estimate. If your total income is high or your filing status results in a higher tax rate, you may still owe money. If your income is low, you may have too much withheld and receive a refund. The only way to know is to file your return.

Can I change my withholding if I already filed my claim?

Yes. You can request or change tax withholding anytime through your state's unemployment website or by calling their office. The change takes effect within one to two weeks. If you are in the middle of receiving benefits, you can request withholding on future payments even if you did not request it when you filed.

What if I owe more in unemployment tax than my refund?

You will receive a bill from the IRS for the difference. You can pay it in full by April 15, request a payment plan, or request an extension to file. The IRS charges interest on unpaid tax starting May 1, so paying as soon as possible after you file reduces the total amount you owe.