Losing a job can bring unexpected stress—not just about finding new work, but also about handling taxes on unemployment benefits. Many people are surprised to learn that unemployment compensation is taxable. If you’re not careful, ignoring taxes now could lead to a nasty surprise from the IRS next year. So, should you withhold taxes from your unemployment benefits, or wait and pay later? Let’s break down what you need to know for 2025.
Are Unemployment Benefits Taxable?
Photo by Nataliya Vaitkevich
The IRS treats most unemployment benefits as taxable income. This means you must report every dollar you get on your federal return. Your state might also tax those payments, but not always.
Each January, you’ll get IRS Form 1099-G summarizing your total unemployment received (Box 1) and taxes withheld (Box 4), if any. Even if you didn’t have tax withheld, you still need to report the full amount.
Federal Tax Obligations for Unemployment Compensation
Federal law says you must report all unemployment benefits as income. The amount counts toward your gross income for the year, along with any other earnings or payments. Any pandemic-era tax breaks that excluded some unemployment income have expired—there are no longer automatic exemptions.
If you received benefits, you must attach Schedule 1 to your Form 1040 and enter the amount from your 1099-G. If you had federal tax withheld, enter that on line 25b to help offset what you owe.
State and Local Tax Implications
States play by their own rules. Some, like Alaska, Florida, Nevada, South Dakota, and Texas, don’t tax unemployment compensation. Most other states do, with rates and thresholds that change year to year. Local taxes may apply in certain areas, so always check your state and city guidelines before filing.
Should You Withhold Taxes From Your Unemployment Benefits?
It’s tempting to keep every dollar now, especially when times are tough. But skipping tax withholding can lead to a large bill at tax time—plus possible penalties if you owe more than expected.
Here’s a straightforward look at your options:
Pros of withholding taxes up front:
- Avoids large lump-sum payments at tax time
- Reduces risk of underpayment penalties
- Spreads tax payments over time, easing your financial burden
Cons of not withholding:
- Keeps more money in your pocket each week
- Increases chances of a large tax bill in spring
- Raises risk of IRS penalties for late or underpaid taxes
The IRS allows you to withhold 10% of your weekly unemployment payments by submitting Form W-4V to your state agency. You can also choose to make quarterly estimated tax payments if you prefer to manage your own withholding.
How Voluntary Withholding Works (Form W-4V)
To have 10% of your unemployment benefits withheld for federal tax, fill out Form W-4V (Voluntary Withholding Request). Give this form to your state unemployment office, not the IRS.
Once submitted, the agency will automatically withhold 10% of each payment and send it to the IRS. This is a simple way to make sure you’re covering your federal tax obligation a bit at a time.
Some states offer voluntary withholding for state tax too—check your benefits portal or ask your agency.
Alternative: Making Quarterly Estimated Tax Payments
If you don’t want withholding, you can make quarterly payments to the IRS. This works like paying taxes on freelance earnings. Use the IRS Tax Withholding Estimator to figure out what you’ll owe.
Estimated tax payments are due four times a year:
- April 15
- June 15
- September 15
- January 15 (of the next year)
You can pay online at IRS.gov or by mail using Form 1040-ES. Just make sure you track your payments and save proof.
Penalties and Tax-Time Surprises
Skipping withholding doesn’t save you money in the long run. If you owe more than $1,000 in taxes and haven’t paid enough throughout the year, the IRS may charge penalties.
Common issues with not withholding:
- Owing hundreds or thousands at once in April
- Late payment penalties and interest
- Ineligible for refunds or payment plans if you can’t pay in full
Planning ahead helps you avoid these headaches.
Special Considerations and Recent Trends
Tax rules update every year. For 2025, most temporary pandemic tax breaks are gone, and digital filing is more common than ever. Other issues, such as fraud or stimulus-related confusion, can complicate things.
Unemployment Benefits vs. Stimulus Payments
It’s easy to mix up unemployment with stimulus checks. Only unemployment benefits are taxable income. Most pandemic stimulus payments, like the Economic Impact Payments (“stimulus checks”), are not taxable and don’t need to be reported as income.
Fraud and Correcting Tax Documents
Mistakes or fraud can happen. If your Form 1099-G shows too much or lists benefits you didn’t receive, act fast:
- Contact your state unemployment office to report errors or suspected identity theft.
- If you’ve been a victim of fraud, your state should issue a corrected 1099-G.
- You may need to amend your tax return if you filed with incorrect info.
IRS and State Filing Updates for 2025
For 2025, expect more digital communications from both the IRS and state agencies. Many states now provide 1099-G forms only electronically. E-filing is strongly encouraged for faster processing and refunds.
Check your state’s website for the latest updates, and consider creating an online account with your unemployment office to access tax documents quickly.
Conclusion
Unemployment benefits are taxable income at the federal level, and most states tax them too. While you’re not required to have taxes withheld, skipping this step can lead to a big, stressful bill at tax time. To protect your finances and avoid surprises from the IRS, consider submitting Form W-4V for voluntary withholding or making estimated tax payments. If you run into document mistakes or fraud, contact your state right away.
The most important step is planning ahead. Review your options, use IRS resources, and if you’re unsure, talk to a tax professional. For more info, visit IRS.gov or your state’s unemployment website. Thinking ahead now keeps tax season calm and predictable—no surprises, just peace of mind.