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3 Ways to Pay Taxes on Unemployment Benefits

By Catherine Brock - May 15, 2020 at 7:06AM

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Ignoring your tax liability on unemployment income can leave you with an unpleasant surprise on next year's Tax Day.

Taxes on unemployment benefits? Yes, you read that right. Unemployment benefits are taxable income. And if you've recently claimed unemployment, you will need a plan to pay those taxes if you want to avoid penalties in 2021.

In early May, the U.S. unemployment rate officially spiked to 14.7%. That's the highest jobless rate seen in the U.S. since 1931, when the country was struggling through the Great Depression. More alarming is the speed at which the coronavirus pandemic took its toll on U.S. jobs. It was only three months ago, in February, that the unemployment rate was 3.5%, a 50-year low.

Woman looking at paper, unhappy.

Image source: Getty Images.

Now, as millions of individuals are learning the ropes of the unemployment system, there's one area of confusion that can create costly missteps: income taxes. As odd as it seems, your unemployment income does incur federal income taxes and, possibly, state income taxes, too.

There are actually only 15 states that don't tax unemployment income, and these are shown in the table below.

States That Don't Tax Unemployment Benefits





New Hampshire



New Jersey






South Dakota


Data source: Yahoo! Finance

If you live in one of these 15 states, you'll owe federal taxes on your unemployment benefits. If you live outside of these 15 states, you'll owe federal and state taxes on that unemployment income.

There are three ways you can cover those tax bills. You can have your taxes withheld from your unemployment check, you can make quarterly tax payments this year, or you can wait until you file your 2021 returns to square up. Spoiler alert: Waiting until 2021 is a bad idea.

Your best option: have taxes withheld

Upon request, you can have taxes withheld directly from your unemployment check. This is the preferred strategy, because it's automated and the estimated taxes never hit your checking account. The state will hold back a percentage based on how it taxes unemployment, plus another 10% to cover your federal taxes.

Unfortunately, the 10% federal withholding may be more or less than your actual tax rate. If 10% is higher than necessary, you'll have lower cash flow today, but you will get a refund next year. If the 10% is too low, you may need to make quarterly tax payments to supplement those withholdings.

You can evaluate the 10% by using the IRS tax withholding calculator or IRS Form 1040-ES to estimate your tax liability. You'll have to make a few assumptions about your income for 2020, but you can run several scenarios to see how those assumptions change what you owe. If it looks 10% withholding on the unemployment isn't enough, plan on picking up the slack with quarterly tax payments.

A good option: make quarterly tax payments

If you don't want taxes withheld from your unemployment checks, or if the withholding is insufficient, you can make direct tax payments to the IRS and your state. These direct payments are called quarterly tax payments, and they're due four times a year as follows:

  • For income from Jan. 1 to March 31, the tax payment is due April 15.
  • For income from April 1 to May 31, the tax payment is due June 15.
  • For income from June 1 to Aug. 31, the tax payment is due Sept. 15.
  • For income from Sept. 1 to Dec. 31, the tax payment is due Jan. 15.

This year only, the IRS and all states have extended the April 15 and June 15 deadlines to July 15, 2020.

You can send in federal tax payments by mail using Form 1040-ES, or make your payments online. Your state should have similar options. Be aware that online payments generally incur some type of transaction fee, which you can avoid by mailing a check.

Last resort: do nothing

Technically, you could collect your full unemployment check without withholding and ignore your tax liability until you file your returns next year. There's no good reason to do this, however. You will eventually have to pay the taxes, along with penalties and interest from the IRS and, possibly, your state.

The IRS penalty is based on prevailing interest rates and was 3.398% of your underpayment in the 2019 tax year, or about $34 for every $1,000 of estimated taxes you should have paid. If you live in a state that taxes unemployment income, you could face additional penalties at the state level.

Use withholding to minimize surprises

If you didn't request tax withholding when you filed for unemployment, call up your state office and ask for withholding now. It may feel counterproductive in a time when cash is really tight, but automating those tax payments is the best long-term play. You should also take the additional step of estimating your taxes for the year, just to ensure the 10% federal withholding has you covered.

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