March 8, 2021
Federal Taxation of Unemployment Insurance Benefits
Unemployment Insurance Benefits Are
According to the U.S. Department of Labor (DOL),
Taxable Income
Employment and Training Administration (ETA) 2112 - UI
Unemployment insurance (UI) benefits have been fully
Financial Transaction Summary Report data, states reported
subject to the federal income taxation since the passage of
that approximately 4.5% of all UI benefits ($1.2 billion out
the Tax Reform Act of 1986 (P.L. 99-514, 26 U.S.C. §85
of $27.4 billion) were withheld for the payment of federal
and 26 C.F.R. §1.85-1). For the purposes of federal income
taxes in 2019. (During 2019, these UI benefits
taxation, the definition of UI benefits includes regular state
predominately would have been UC payments.) In contrast,
Unemployment Compensation (UC) benefits, Extended
the percentage withheld decreased to approximately 3.7%
Benefits (EB), Trade Adjustment Assistance (TAA)
of all UI benefits ($19.9 billion out of $532.4 billion) from
benefits, Disaster Unemployment Assistance (DUA), as
April 2020 through December 2020 (when CARES Act
well as railroad unemployment benefits. For 2009,
benefits were available). These data imply that CARES Act
Congress provided an exclusion for up to $2,400 in UI
UI claimants may be less likely to have taxes withheld than
benefits. An exclusion of up to $10,200, for taxpayers with
claimants of permanent-law UI benefits.
modified adjusted gross income (AGI) of less than
$150,000, is being considered as part of the American
Federal Tax Withholding: Regular UC and EB
Rescue Plan Act of 2021 (H.R. 1319, as amended).
Since 1997, federal tax law (26 U.S.C. §3304(a)(18)) has
required state UC agencies to offer regular UC and EB
Coronavirus Disease 2019 (COVID-19) Temporary
beneficiaries the opportunity to elect federal income tax
UI Programs
withholding at the time the claimant first files for UC
The Coronavirus Aid, Relief, and Economic Security Act
benefits. Claimants who elect to have federal income tax
(CARES Act; P.L. 116-136, as amended) provided four
withheld from their regular UC benefits must file IRS Form
additional temporary UI benefits, each of which is also
W-4V, Voluntary Withholding Request unless the state
subject to federal income taxation. These are
agency has its own form for requesting federal income tax
Pandemic Emergency Unemployment Compensation
withholding; if so, the claimant should use that state form.
(PEUC),
The current withholding rate for federal income tax is 10%
of the gross UI payment.
Pandemic Unemployment Assistance (PUA),
Federal Pandemic Unemployment Compensation
Federal Tax Withholding: PEUC
(FPUC), and
States also must offer PEUC recipients the opportunity to
Mixed-Earner Unemployment Compensation (MEUC). elect federal income tax withholding. DOL bases this
Additionally, Lost Wages Assistance (LWA) payments are
requirement on Section 2107(a)(4)(B) of the CARES Act,
subject to federal income taxation. (On August 8, 2020,
which requires that state and federal UC laws apply to
President Trump issued a presidential memorandum
PEUC claims and payments to the extent practicable. (This
creating LWA, a grant program that supplemented the
information is based on DOL/ETA email communication
weekly benefits of certain eligible UI claimants through
with authors, March 2, 2021.)
September 5, 2020.)
Federal Tax Withholding: PUA
State UC Agencies Must Inform Beneficiaries That
The CARES Act does not require that states offer PUA
Payments Are Taxable
claimants the opportunity to elect to withhold taxes.
The tax code treats UI benefits like other ordinary income,
However, as in the case of all UC payments, DOL requires
such as wages. States are required to inform beneficiaries
state UC agencies to inform individuals that the CARES
that state UC payments are included in the individual’s
Act UI benefits are subject to federal income taxation. State
gross income for federal income tax purposes and that the
agencies are encouraged by DOL to provide a withholding
individual will receive Internal Revenue Service (IRS)
option for PUA beneficiaries.
Form 1099-G to file with their income tax return.
States agencies must inform PUA recipients that PUA
Income Tax Withholding from UI
benefits are included in the individual’s gross income for
Payments
federal income tax purposes and that the individual will
Individuals may have the option to elect to have states
receive IRS Form 1099-G to file with their income tax
withhold federal (and in some cases, state) income tax from
return. This information may be distributed to the
some types of UI benefits. Alternatively, individuals may
individual by several different methods, including on the
opt to pay estimated federal taxes on UI benefits using IRS
Notice of Monetary Determination, in the Benefit Rights
Form 1040-ES or pay such taxes when filing a federal
Information packet, or where the state deems appropriate
income tax return.
for notifying individuals.
https://crsreports.congress.gov
link to page 2 Federal Taxation of Unemployment Insurance Benefits
Federal Tax Withholding: FPUC and MEUC
Taxpayers Reporting Unemployment
The CARES Act does not require that states offer claimants
Benefits by Income
receiving FPUC and MEUC the opportunity to withhold
Table 1 shows the estimated number of federal income tax
taxes. However, DOL requires states to withhold taxes from
returns reporting unemployment benefits by AGI in tax year
FPUC and MEUC payments if claimants have opted to
2018 (the most recently available data). Approximately
withhold income taxes from UC, EB, PEUC, or PUA.
1.45 million tax returns (almost one-third) of all tax returns
reporting UI payments did not have a taxable return (i.e.,
Federal Tax Withholding: LWA
they did not owe income taxes) and thus, their filers paid no
States were required to notify individuals that LWA
taxes on UI benefits for tax year 2018.
payments were subject to federal income taxation but were
not required to provide the option to withhold federal
Table 1. Tax Returns with Reported Unemployment
income taxes.
Insurance (UI), Tax Year 2018
State Tax Withholding
Adjusted Gross
Number
UI
Share of
In addition to being subject to federal income taxes, in most
Income
of
Income
UI Income
states that have an income tax, UI benefits are taxed.
(AGI)
Returns
(millions)
(%)
Federal law does not require that states offer state income
Total returns
4,517,744
$21,998.2
100.0%
tax withholding to UC beneficiaries, although, according to
DOL, many do offer this option. Beneficiaries may opt to
Nontaxable returns
1,450,151
$6,486.6
29.5%
pay quarterly estimated taxes if a state does not offer state
AGI Category (thousands)
income tax withholding.
Under $15K
495,268
$1,720.7
7.8%
State Unemployment Agencies Report
UI Benefits Through Form 1099-G
15K - under 30K
1,041,683
$4,578.3
20.8%
State unemployment agencies must provide UI claimants
30K - under 50K
897,053
$4,516.4
20.5%
IRS Form 1099-G, showing the total amount of benefits
paid and the amount of federal taxes withheld for the
50K - under 100K
1,270,536
$6,577.8
29.9%
previous tax year, by January 31 of each year.
100K - under 200K
651,052
$3,613.1
16.4%
Identity Theft and Fraudulent UI
200K - under $1
158,877
$968.1
4.4%
Payments
mil ion
On January 28, 2021, the IRS advised taxpayers who
$1 mil ion and
3,273
$23.9
0.1%
receive an IRS Form 1099-G with incorrectly reported
above
unemployment benefits to contact the issuing state UC
agency. These taxpayers should request a revised Form
Source: CRS table using IRS Statistics of Income data, Table 1.4.
1099-G, showing they did not receive the incorrectly
Notes: Adjusted gross income (AGI) is total income minus statutory
reported benefits. The IRS advised taxpayers who are
adjustments. Data are IRS estimates based on a sample of tax returns.
unable to obtain a timely, corrected form from states to file
UI income is rounded to nearest $100,000.
an accurate tax return that reports only the UI income
IRS Table 1.4 applies the term of “Unemployment Compensation”
received. The IRS advised that taxpayers will still need to
when referring to UI benefits.
obtain a corrected Form 1099-G showing zero (or accurate)
UI benefits in cases of identity theft to avoid an unexpected
In 2018, income from UI was received by taxpayers across
federal tax bill for unreported income.
the income distribution. An estimated 49.2% of UI income
was received by taxpayers with an AGI of less than $50,000
Tax Exclusion Authority for UI Benefits
in 2018. An estimated 20.9% of UI income went to
Since it began to treat all UI benefits as fully taxable
taxpayers with an AGI of at least $100,000 in 2018.
income, Congress has taken action once to exclude a
portion of UI benefits from taxable income. The American
Resources
Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-
CRS Report R46687, Current Status of Unemployment
5, §1007) included a temporary exclusion on the first
Insurance (UI) Benefits: Permanent-Law Programs and
$2,400 of UI benefits per individual for the purposes of the
COVID-19 Pandemic Response
federal income tax. This exclusion applied only for the
CRS Report RS21356, Taxation of Unemployment
2009 tax year. The Joint Committee on Taxation estimated
Benefits
that this exclusion reduced federal receipts by
approximately $4.7 billion.
Julie M. Whittaker, Specialist in Income Security
The Senate-passed version of the American Rescue Plan
Katelin P. Isaacs, Specialist in Income Security
Act of 2021 (H.R. 1319, as amended) includes a provision
Molly F. Sherlock, Specialist in Public Finance
to exclude up to $10,200 in UI benefits from income in
IF11782
2020 for taxpayers with modified adjusted gross income
(AGI) of less than $150,000. The $150,000 AGI threshold
applies regardless of the taxpayer’s filing status (i.e.,
married filing jointly, single, or head of household).
https://crsreports.congress.gov
Federal Taxation of Unemployment Insurance Benefits
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