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Taxes & Unemployment Benefits

Here is what you need to know about paying taxes on unemployment benefits.

Over 36.5 million Americans have filed for unemployment as the Coronavirus pandemic hit the U.S. and prompted many businesses to hit pause. But thanks to federal lawmakers, more out-of-work Americans can apply for unemployment benefits and also get more in their pocket under new, temporary rules put in place. 
Why Withholding Makes Sense:
While these benefits are good news for many struggling amid the pandemic, according to the IRS these benefits are not free money.  Although you don’t have to pay Social Security or Medicare taxes, you do have to pay federal and state income taxes on these benefits. 

Unemployment benefits are taxable income under federal and state law. The benefits paid to you are reported to the Internal Revenue Service and to the Nebraska Department of Revenue. No income tax is withheld from your benefit payments unless you request it. If you decide to have taxes withheld, 10 percent will be deducted from your weekly benefit payment for federal taxes. You can request, stop, or change your income tax withholding by logging into your account at

By January 31, you will receive a Form 1099-G (Certain Government Payments) from the state that paid your unemployment benefits. Taking a hit upfront could be better than finding out you owe the IRS at the end of the year. This is especially important if you've earned income this year and/or expect to be rehired or employed again before the end of 2020, because then you're likely to be in a higher tax bracket and may not qualify for as many credits to offset your earnings. 

How do you withhold?
There are several ways to pay taxes on unemployment, including:
  • Have taxes automatically withheld (you can request a form W-4V to accomplish this)
  • Make estimated tax payments to the IRS
  • Pay income taxes when you file your tax return
What about stimulus checks?
Stimulus checks, on the other hand, are not reported as income and you will not owe tax on them. The payment will not reduce your refund or increase the amount you owe when you file your 2020 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs.