Federal Taxation of Unemployment Insurance Benefits

Federal Taxation of Unemployment Insurance Benefits

Updated March 18, 2021
Federal Taxation of Unemployment Insurance Benefits
Unemployment Insurance Benefits Are
some types of UI benefits. Alternatively, individuals may
Taxable Income
opt to pay estimated federal taxes on UI benefits using IRS
Unemployment insurance (UI) benefits have been fully
Form 1040-ES or pay such taxes when filing a federal
subject to federal income taxation since the passage of the
income tax return.
Tax Reform Act of 1986 (P.L. 99-514, 26 U.S.C. §85 and
26 C.F.R. §1.85-1). For the purposes of federal income
According to the U.S. Department of Labor (DOL),
taxation, the definition of UI benefits includes regular state
Employment and Training Administration (ETA) 2112-UI
Unemployment Compensation (UC) benefits, Extended
Financial Transaction Summary Report data, states reported
Benefits (EB), Trade Adjustment Assistance (TAA)
that approximately 4.5% of all UI benefits ($1.2 billion out
benefits, and Disaster Unemployment Assistance (DUA), as
of $27.4 billion) were withheld for the payment of federal
well as railroad unemployment benefits, and has included
taxes in 2019. (During 2019, these UI benefits
all temporary UI benefits since UI benefits became taxable.
predominately would have been UC payments.) In contrast,
the percentage withheld decreased to approximately 3.7%
The American Rescue Plan Act of 2021 (P.L. 117-2) allows
of all UI benefits ($19.9 billion out of $532.4 billion) from
taxpayers with modified adjusted gross income (AGI) of
April 2020 through December 2020 (when CARES Act
less than $150,000 to exclude up to $10,200 in UI benefits
benefits were available). These data imply that CARES Act
from 2020 taxable income. This applies to all UI benefits
UI claimants may be less likely to have taxes withheld than
including the temporary UI benefits discussed below. For
claimants of permanent-law UI benefits.
2009, Congress provided an exclusion from taxable income
for up to $2,400 in UI benefits.
Federal Tax Withholding: Regular UC and EB
Since 1997, federal tax law (26 U.S.C. §3304(a)(18)) has
Coronavirus Disease 2019 (COVID-19) Temporary
required state UC agencies to offer regular UC and EB
UI Programs
beneficiaries the opportunity to elect federal income tax
The Coronavirus Aid, Relief, and Economic Security Act
withholding at the time the claimant first files for UC
(CARES Act; P.L. 116-136, as amended) provided four
benefits. Claimants who elect to have federal income tax
additional temporary UI benefits, each of which is also
withheld from their regular UC benefits must file IRS Form
subject to federal income taxation. These are
W-4V, Voluntary Withholding Request unless the state
 Pandemic Emergency Unemployment Compensation
agency has its own form for requesting federal income tax
(PEUC),
withholding; if so, the claimant should use that state form.

The current withholding rate for federal income tax is 10%
Pandemic Unemployment Assistance (PUA),

of the gross UI payment.
Federal Pandemic Unemployment Compensation
(FPUC), and
Federal Tax Withholding: PEUC
 Mixed-Earner Unemployment Compensation (MEUC). States also must offer PEUC recipients the opportunity to
Additionally, Lost Wages Assistance (LWA) payments are
elect federal income tax withholding. DOL applies 26
subject to federal income taxation. (On August 8, 2020,
U.S.C. Section 3304(a)(18) to PEUC based upon Section
President Trump issued a presidential memorandum
2107(a)(4)(B) of the CARES Act, which requires that state
creating LWA, a grant program that supplemented the
and federal UC laws apply to PEUC claims and payments
weekly benefits of certain eligible UI claimants through
to the extent practicable.
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.
State 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
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link to page 2 Federal Taxation of Unemployment Insurance Benefits
individual by several different methods, including on the
estimates this exclusion will reduce FY2021 revenues by
Notice of Monetary Determination, in the Benefit Rights
$25.0 billion.
Information packet, or as the state deems appropriate.
Taxpayers Reporting Unemployment
Federal Tax Withholding: FPUC and MEUC
Benefits by Income
DOL applies 26 U.S.C. Section 3304(a)(18) to FPUC and
Table 1 shows the estimated number of federal income tax
MEUC. Thus, states must offer individuals receiving FPUC
returns reporting unemployment benefits by AGI in tax year
and MEUC the opportunity to withhold taxes from FPUC
2018 (the most recently available data). Approximately
and MEUC payments.
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
UI
Share of
In addition to being subject to federal income taxes, in most
Income
Number
Income
UI Income
states that have an income tax, UI benefits are taxed.
(AGI)
of Returns (millions)
(%)
Federal law does not require that states offer state income
tax withholding to UC beneficiaries, although, according to
Total returns
4,517,744
$21,998.2
100.0%
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
income tax withholding.
AGI Category (thousands)
State Unemployment Agencies Report
Under $15K
495,268
$1,720.7
7.8%
UI Benefits Through Form 1099-G
$15K - under $30K
1,041,683
$4,578.3
20.8%
State unemployment agencies must provide UI claimants
IRS Form 1099-G, showing the total amount of benefits
$30K - under $50K
897,053
$4,516.4
20.5%
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.
Identity Theft and Fraudulent UI
$100K - under
651,052
$3,613.1
16.4%
Payments
$200K
On January 28, 2021, the IRS advised taxpayers who
$200K - under $1
158,877
$968.1
4.4%
receive an IRS Form 1099-G with incorrectly reported
mil ion
unemployment benefits to contact the issuing state UC
$1 mil ion and above
3,273
$23.9
0.1%
agency. These taxpayers should request a revised Form
1099-G, showing they did not receive the incorrectly
Source: CRS table using IRS Statistics of Income data, Table 1.4.
reported benefits. The IRS advised taxpayers who are
Notes: Adjusted gross income (AGI) is total income minus statutory
unable to obtain a timely, corrected form from states to file
adjustments. Data are IRS estimates based on a sample of tax returns.
an accurate tax return that reports only the UI income
UI income is rounded to nearest $100,000.
received. The IRS advised that taxpayers will still need to
IRS Table 1.4 applies the term of “Unemployment Compensation”
obtain a corrected Form 1099-G showing zero (or accurate)
when referring to UI benefits.
UI benefits in cases of identity theft to avoid an unexpected
federal tax bill for unreported income.
In 2018, income from UI was received by taxpayers across
Tax Exclusion Authority for UI Benefits
the income distribution. An estimated 49.2% of UI income
was received by taxpayers with an AGI of less than $50,000
Since it began to treat all UI benefits as fully taxable
in 2018. An estimated 20.9% of UI income went to
income, Congress has taken action once to exclude a
taxpayers with an AGI of at least $100,000 in 2018.
portion of UI benefits from taxable income. The American
Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-
Resources
5, §1007) included a temporary exclusion on the first
 CRS Report R46687, Current Status of Unemployment
$2,400 of UI benefits per individual for the purposes of the
Insurance (UI) Benefits: Permanent-Law Programs and
federal income tax. This exclusion applied only for the
COVID-19 Pandemic Response
2009 tax year. The Joint Committee on Taxation (JCT)
estimated that this exclusion reduced federal receipts by
 CRS Report RS21356, Taxation of Unemployment
approximately $4.7 billion.
Benefits
The American Rescue Plan Act of 2021 (P.L. 117-2, §9042)
Julie M. Whittaker, Specialist in Income Security
allows taxpayers with modified adjusted gross income
Katelin P. Isaacs, Specialist in Income Security
(AGI) of less than $150,000 to exclude up to $10,200 in UI
Molly F. Sherlock, Specialist in Public Finance
benefits from income in 2020. The $150,000 AGI threshold
applies regardless of the taxpayer’s filing status (i.e.,
IF11782
married filing jointly, single, or head of household). JCT
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Federal Taxation of Unemployment Insurance Benefits

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