Did You Receive Unemployment in 2021? You May Owe the IRS Money

There's no tax break for unemployment benefits received last year, which means you may owe more than you expected.

Courtney Johnston Senior Editor
Courtney Johnston is a senior editor leading the CNET Money team. Passionate about financial literacy and inclusion, she has a decade of experience as a freelance journalist covering policy, financial news, real estate and investing. A New Jersey native, she graduated with an M.A. in English Literature and Professional Writing from the University of Indianapolis, where she also worked as a graduate writing instructor.
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Dori Zinn loves helping people learn and understand money. She's been covering personal finance for a decade and her writing has appeared in Wirecutter, Credit Karma, Huffington Post and more.
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Unemployment numbers surged at the start of the COVID-19 pandemic, topping out at 14.7% in April 2020. Even though numbers decreased in 2021, they're still above prepandemic levels. Expanded unemployment benefits, which ended on Labor Day in 2021, provided a lifeline for millions throughout the pandemic. However, if you received any jobless benefits at all last year, you might be in for a shock when you file your taxes

Unlike stimulus checks, which you don't have to pay taxes on, unemployment payments are considered taxable income and will need to be accounted for on your 2021 return. And this tax season, you won't be able to rely on a tax break for unemployment insurance, either. While taxes had been waived on up to $10,200 received in unemployment for those making less than $150,000 in 2020 -- the first year of the pandemic -- that was only temporary relief and no such tax break exists for UI received in 2021.

Here's everything you need to know about unemployment benefits for this tax season.

Do you have to pay taxes on unemployment?

Yes. The IRS considers unemployment benefits "taxable income." When filing this spring, your unemployment checks from 2021 will be counted as income, taxed at your regular rate. This applies both to standard unemployment benefits and the expanded benefits that were available to some during 2021. 

Unlike traditional employment, where taxes are withheld from your paycheck, you're not required to have federal taxes withheld from your benefit payments. Unless you opted to have taxes withheld, you could end up owing taxes when you file your tax return.

Do you have to pay state taxes on unemployment?

Maybe. If your state of residence collects income taxes, you may have to pay taxes on your benefits to both state and federal governments. That noted, there are a few states that waive unemployment income taxes. They are:

  • California
  • Montana
  • New Jersey
  • Pennsylvania
  • Virginia

Indiana and Wisconsin both offer partial exclusions.

How do I know if I already paid taxes on my unemployment benefits?

If you received unemployment insurance this year, you'll receive a Form 1099-G, which shows how much money you received from your unemployment benefits. It will also show whether or not you elected to withhold taxes and, if so, how much was withheld.

How to avoid a large tax bill in the future

Whether or not you decide to withhold taxes from your unemployment benefits depends on your financial situation. If you need the full payment to get by, it may sound appealing to put off paying taxes in the hope of being in a stronger financial situation later on. That noted, it can be devastating to get hit with a big tax bill in the spring. 

Your options include making estimated quarterly tax payments in advance, having your taxes automatically withheld from each payment or paying in full when you file your tax return the following year.

Many sole proprietors and freelancers make estimated quarterly tax payments, which lets you spread out what you owe into four annual payments. That noted, because these payments are based on your estimated total income, you could end up paying too much -- resulting in a refund -- or too little -- which would require an extra payment come the April 18 deadline. 

To have your unemployment checks taxed like a regular paycheck, you can fill out Form W-4V. Since taxes will be withheld from each payment, it will reduce the amount you receive weekly, but can prevent you from owing a hefty tax bill the following tax season.