Taxing Unemployment Insurance (UI) Benefits: Federal- and State-Level Tax Treatment During the COVID-19 Pandemic

May 16, 2022 R47105

Taxing Unemployment Insurance (UI) Benefits: May 16, 2022
Federal- and State-Level Tax Treatment During Julie M. Whittaker
the COVID-19 Pandemic
Specialist in Income
Security
Unemployment insurance (UI) benefits have generally been fully subject to federal income

taxation since the Tax Reform Act of 1986 (P.L. 99-514). For federal income tax purposes, UI
Katelin P. Isaacs
benefits include regular state Unemployment Compensation (UC), Extended Benefits (EB),
Specialist in Income
Trade Adjustment Assistance (TAA) benefits, Disaster Unemployment Assistance (DUA),
Security
railroad unemployment benefits, and all temporary UI benefits created in response to recessions

(such as the now-expired COVID-19 UI benefits). A special provision allowed up to $10,200 of
UI benefits paid in 2020 to be excluded from federal taxable income for some taxpayers.

This report describes the federal taxation of UI benefits, including federal income tax withholding requirements related to the
now-expired COVID-19 UI benefits. It also provides Internal Revenue Service (IRS) data on the estimated number of federal
income tax returns reporting unemployment benefits by adjusted gross income (AGI) in tax year 2019 (the most recent data
year available). These data show that in tax year 2019, UI income was concentrated among middle- and lower-income tax
filers (those with an AGI of less than $50,000). Almost 30% of tax returns reporting UI payments in 2019 (1.29 million,
representing approximately 26% of UI payments) did not have a taxable return; these tax filers did not owe income taxes and
paid no taxes on their UI benefits for that year.
The report uses data collected by U.S. Department of Labor (DOL) to describe recent patterns of optional federal income tax
withholding of UI benefits. States reported to DOL that approximately 5.1% of all UI benefits were withheld for the payment
of federal income taxes in 2019, compared with approximately 4.2% in 2020 and 4.1% in 2021 (i.e., years when the now-
expired COVID-19 UI benefits were authorized). The lower reported percentages of UI benefits withheld for the payment of
federal taxes in 2020 and 2021 suggest that UI claimants may have been less likely to have taxes withheld from COVID-19
UI benefits than other types of UI benefits. Because the COVID-19 UI benefits provided higher levels of income replacement
than permanent-law UI benefits (often exceeding previously reported weekly wages) and some states did not provide federal
income tax withholding opportunities for certain types of COVID-19 UI benefits, some individuals may have had
unexpectedly high federal income taxes due at the end of tax years 2020 and 2021.
This report also explains the federal income tax exclusion authorized for UI payments made in 2020. The American Rescue
Plan Act of 2021 (P.L. 117-2) allowed taxpayers with modified AGI of less than $150,000 to exclude up to $10,200 in UI
benefits from 2020 taxable income. This federal income tax exclusion applied to all UI benefits, including the now-expired
COVID-19 UI benefits. UI benefits paid in 2021 or later do not qualify for this tax exemption, even in situations of delayed
benefit payments based on a period of unemployment in 2020.
Finally, this report summarizes state income tax treatment of UI benefits, including whether a state offers to withhold state
income taxes from UI benefits and the state’s withholding rate. Most states that have state income taxes include UI benefits
in taxable income, and many of them offer state income tax withholding to UI claimants. Many states that tax UI benefits
also provided a temporary tax exclusion for these benefits in 2020 similar to the temporary federal exclusion. A few states
have extended this option for the 2021 tax year.
For more information on UI benefits, including the now-expired COVID-19 UI benefits, see CRS Report R46687,
Unemployment Insurance (UI) Benefits: Permanent-Law Programs and the COVID-19 Pandemic Response.
For the legislative history on the taxation of UI benefits, see CRS Report RS21356, Taxation of Unemployment Benefits.

Congressional Research Service

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Introduction
Congress enacted several temporary, now-expired Unemployment Insurance (UI) benefits for
workers unemployed due to the COVID-19 pandemic and the resulting disruption of the economy
and labor market. These temporary UI programs (1) augmented all UI benefits, (2) created
additional weeks of benefits, and (3) expanded coverage to new groups of workers through a new
benefit. Both the potential benefit duration (i.e., a maximum of more than 17 months) and the
unprecedented magnitude of benefit augmentation had potential tax implications for UI
recipients.
The COVID-19 UI benefits authorized from March 2020 through September 2021 provided
higher levels of income replacement than UI benefits paid during 2019. Benefits often exceeded
previous weekly wages. For some individuals, higher UI benefit payments raised concerns about
higher-than-anticipated federal income tax liabilities. Some states did not provide federal income
tax withholding opportunities for certain types of COVID-19 UI benefits, further contributing to
this concern.
This report provides information on the federal taxation of UI benefits, including federal income
tax withholding requirements related to the now-expired COVID-19 UI benefits. The report also
discusses the federal income tax exclusion authorized for UI payments in 2020, which allowed
taxpayers with modified adjusted gross income (AGI) of less than $150,000 to exclude up to
$10,200 in UI benefits from 2020 taxable income. It also provides information from the Internal
Revenue Service (IRS) on the amounts of UI benefits that were taxed in 2019 as well as program
data on the percentage of all UI benefits that was withheld for the payment of federal income
taxes in 2019 through 2021. Finally, the report summarizes state income tax treatment of UI
benefits, including whether a state offers to withhold state income taxes from UI benefits, the
state’s withholding rate, and whether the state matched the temporary federal tax exclusion on up
to $10,200 of UI benefits in 2020.
UI Benefits: the COVID-19 Pandemic Response
The UI system’s two main objectives are to provide temporary and partial wage replacement to
involuntarily unemployed workers and to stabilize the economy during recessions. The two
permanent-law UI benefits—Unemployment Compensation (UC) and Extended Benefits (EB)—
are countercyclical, with spending and weekly benefit payments that increase automatically
during a recession. Congress often supplements these permanently authorized economic
stabilization measures by enacting temporary UI benefit expansions during recessions.1
In response to the recent recession2 and the economic disruption caused by the COVID-19
pandemic, Congress enacted several temporary, now-expired UI programs through the
Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). Congress
extended these programs through Division N, Title II, Subtitle A (the Continued Assistance for
Unemployed Workers Act of 2020, or “Continued Assistance Act”) of the Consolidated
Appropriations Act, 2021 (P.L. 116-260); and further extended them through Title IX, Subtitle A,

1 For pre-2020 temporary UI benefit expansions, see CRS Report RL34340, Extending Unemployment Compensation
Benefits During Recessions.
2 The National Bureau of Economic Research dates the beginning of the COVID-19 recession to February 2020. The
recovery began two months later in April 2020; see https://www.nber.org/research/data/us-business-cycle-expansions-
and-contractions.
Congressional Research Service

1

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

of the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2).3 The programs included the
following:
 Federal Pandemic Unemployment Compensation (FPUC) first provided a
temporary, additional $600-a-week benefit financed by the federal government4
that augmented most weekly UI benefits for weeks of unemployment beginning
on March 29, 2020,5 through July 25, 2020.6 No FPUC benefits were payable for
weeks of unemployment that began after July 25, 2020,7 until the reauthorization8
(and reestablishment) of the temporary FPUC benefit at a lower amount of $300
per week (by the Continued Assistance Act). The lower $300 weekly FPUC
payments were available for weeks of unemployment beginning on or after
December 26, 2020,9 through September 4, 2021.10
 Pandemic Emergency Unemployment Compensation (PEUC) provided a total
of 49 additional weeks of federally financed UI benefits at an amount equivalent
to regular state UI benefits for individuals who exhausted state and federal UI
benefits and were able to work, available for work, and actively seeking work,
subject to COVID-19-related flexibilities, from March 29, 2020,11 through
September 4, 2021.12
 Pandemic Unemployment Assistance (PUA) provided a total of 75 weeks of a
temporary, federal UI program for individuals who were (1) not otherwise
eligible for UI benefits (e.g., self-employed, independent contractors, gig
economy workers); (2) unemployed, partially unemployed, or unable to work due
to a specific COVID-19-related reason; and (3) not able to telework and not
receiving any paid leave. The PUA benefit was designed to approximate what
workers would have received if their employment had been covered by the UI

3 For details on these temporary programs, see CRS Report R46687, Unemployment Insurance (UI) Benefits:
Permanent-Law Programs and the COVID-19 Pandemic Response.
4 Permanent-law UC benefits are financed by the states; under permanent law, the EB program is financed 50% by the
states and 50% by the federal government.
5 March 30, 2022, in New York. For the purposes of UI programs and benefits, New York defines week as Monday to
Sunday; every other state defines week as Sunday to Saturday. Therefore, the benefit expiration date in New York falls
one calendar day later than in other states.
6 These included regular UC, Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment
Compensation (PEUC), EB, Disaster Unemployment Assistance (DUA), Short-Time Compensation (STC), Trade
Readjustment Allowance (TRA), and Self Employment Assistance (SEA). For information on TRA, see CRS Report
R44153, Trade Adjustment Assistance for Workers and the TAA Reauthorization Act of 2015. For information on SEA,
see CRS Report R41253, The Self-Employment Assistance (SEA) Program.
7 July 26, 2020, in New York.
8 For U.S. Department of Labor (DOL) guidance on the FPUC extension in the Continued Assistance Act, see DOL,
Employment and Training Administration (ETA), “Continued Assistance for Unemployed Workers (Continued
Assistance) Act of 2020—Federal Pandemic Unemployment Compensation (FPUC) Program Reauthorization and
Modification and Mixed Earners Unemployment Compensation (MEUC) Program Operating, Reporting, and Financial
Instructions,” UIPL No. 15-20, Change 3, January 5, 2021, https://wdr.doleta.gov/directives/corr_doc.cfm?docn=6122.
9 December 27, 2020, in New York.
10 September 5, 2021, in New York.
11 March 30, 2020, in New York.
12 September 5, 2021, in New York.
Congressional Research Service

2

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

program. PUA was payable for weeks of unemployment beginning on February
2, 2020,13 through September 4, 2021.14
The Continued Assistance Act authorized an additional, temporary UI benefit:
 Mixed Earner Unemployment Compensation (MEUC) provided, at state
option, a $100-per-week benefit augmentation for unemployed workers with
income from both wage-and-salary jobs and self-employment who were not
currently receiving PUA. MEUC was available in most states for weeks of
unemployment beginning on or after December 27, 2020, through September 4,
2021.
Additionally, President Trump issued a presidential memorandum15 that created a short-term
temporary benefit:
 Lost Wages Assistance (LWA) was paid as a $300-per-week supplement to
individuals with underlying weekly UI benefit amounts of at least $100; or if a
state chose to contribute an additional $100 a week in state funds, the total
supplement would have been $400 a week.16 LWA was not available to those
receiving Disaster Unemployment Assistance (DUA). The first week of
unemployment covered by LWA began on July 26, 2020,17 and all states ended
LWA payments for the weeks of unemployment ending on or before September 6,
2020.18
UI Benefits: Taxable Income Under Federal Tax Law
UI benefits have been fully subject to federal income taxation since 1987.19 The two underlying
rationales for fully subjecting UI benefits to income tax are (1) to treat the benefits the same as
wages and (2) to eliminate the work disincentive caused by the previously favorable tax treatment
for UI benefits relative to wages.20 This federal tax treatment means unemployment benefits are

13 February 3, 2020, in New York.
14 September 5, 2021, in New York.
15 White House, “Memorandum on Authorizing the Other Needs Assistance Program for Major Disaster Declarations
Related to Coronavirus Disease 2019,” August 8, 2020, available at https://trumpwhitehouse.archives.gov/presidential-
actions/memorandum-authorizing-needs-assistance-program-major-disaster-declarations-related-coronavirus-disease-
2019/.
16 South Dakota and American Samoa did not participate in LWA. Guam, Kentucky, and Montana supplemented LWA
with an additional $100 weekly payment. All jurisdictions participating in LWA provided up to six weeks of benefits
with the following exceptions: the Commonwealth of Northern Mariana Islands agreed to provide up to three weeks,
Florida provided up to four weeks, Idaho provided up to five weeks, and the U.S. Virgin Islands provided up to three
weeks. (Email exchange between CRS and FEMA, Office of External Affairs, February 6, 2021.)
17 July 27, 2020, in New York.
18 LWA was potentially available for weeks of unemployment between July 26, 2020, and December 27, 2020, but the
memorandum required that the program be terminated earlier if either (1) Congress had enacted supplemental COVID-
19 pandemic-related unemployment compensation (e.g., reestablished the FPUC authority, which did not occur during
that period) or (2) certain conditions were met related to the balance of the Disaster Relief Fund (DRF). By the week
ending September 6, 2020, the balance of the DRF required that the LWA be terminated. (Email exchange between
CRS and FEMA, Office of the Chief Financial Officer, November 9, 2020).
19 As required under the Tax Reform Act of 1986 (P.L. 99-514, enacted October 22, 1986). For the history of the
federal income tax treatment of UI benefits, see CRS Report RS21356, Taxation of Unemployment Benefits.
20 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986 (H.R. 3838, 99th Congress; P.L.
99-514), JCS-10-87, May 4, 1987, pp. 29-30.
Congressional Research Service

3

link to page 12 Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

treated the same as wages and other ordinary income with regard to federal income taxes.
However, UI benefits are not subject to payroll taxes, including Social Security and Medicare
taxes, because the benefits are not considered to be wages.21
For the purposes of federal income taxation,22 the definition of UI benefits includes regular state
UC benefits, EB,23 Trade Adjustment Assistance (TAA) benefits,24 DUA,25 and railroad
unemployment benefits,26 and has included all temporary UI benefits (e.g., FPUC, PEUC, PUA,
MEUC, and LWA) since UI became taxable.27 In addition to being subject to federal income
taxes, unemployment benefits are taxed in most states that have an income tax.28
UI Replacement Rates
Most state UC benefit calculations generally replace half of a claimant’s average weekly wage up
to a weekly maximum (cap) for up to 26 weeks.29 Before the COVID-19 pandemic, the average
ratio of UI benefits to prior earnings generally ranged from 30% to 50%.30 In general, workers
with higher earnings would have lower replacement rates than average in state UC calculations,
in part because of the cap on maximum benefits.
Weekly UI benefits in 2020 and 2021 often provided significantly higher levels of gross income
replacement than had previously been the case, as the underlying UI benefit was augmented by
temporary measures (e.g., the $600 or $300 weekly FPUC benefit, the $300 weekly LWA benefit,
the $100 weekly MEUC benefit). For example, when authorized from April through July 2020,

21 For more information on payroll taxes, see CRS Report R47062, Payroll Taxes: An Overview of Taxes Imposed and
Past Payroll Tax Relief .
22 For the full definition of UI benefits under tax law, see 26 U.S.C. Section 85. See also 26 C.F.R. §1.85-1.
23 For more information on UC and EB, see CRS Report R46687, Unemployment Insurance (UI) Benefits: Permanent-
Law Programs and the COVID-19 Pandemic Response.
24 For more information on TAA, see CRS In Focus IF10570, Trade Adjustment Assistance for Workers (TAA).
25 For more information on DUA, see CRS Report RS22022, Disaster Unemployment Assistance (DUA).
26 For more information on railroad unemployment benefits, see CRS Report RS22350, Railroad Retirement Board:
Retirement, Survivor, Disability, Unemployment, and Sickness Benefits.
27 For more information on historical, temporary UI benefits created by Congress in response to prior responses, see
CRS Report RL34340, Extending Unemployment Compensation Benefits During Recessions. For more information on
the now-expired COVID-19 UI benefits, see CRS Report R46687, Unemployment Insurance (UI) Benefits: Permanent-
Law Programs and the COVID-19 Pandemic Response.
28 Table 2, below, provides detailed information on how states treat UI benefits in their state income tax systems.
29 Although there are broad requirements under federal law regarding UC and EB benefits and financing, the specifics
are set out under each jurisdiction’s laws, resulting in 53 different UC programs operated in the 50 states, the District of
Columbia, Puerto Rico, and the U.S. Virgin Islands. DOL provides oversight of state UC programs and state
administration of federal UI benefits. States operate their own permanent-law UC and EB programs and also administer
any temporary federal UI benefits. Each state’s UC laws determine the weekly benefit amount and the number of
weeks of UC available to an unemployed worker. The UC benefit amount is used for the purposes of EB and most
temporary federal UI benefit extensions (e.g., PEUC). Most states provide up to 26 weeks of UC to eligible individuals
who become involuntarily unemployed for economic reasons and meet state-established eligibility rules.
30 For a summary of each state’s benefit calculation, see Table 3-5 “Weekly Benefit Amounts” in DOL, Comparison of
State Unemployment Insurance Laws, Chapter 3. Monetary Entitlement, Washington, DC, 2021, p. 72,
https://oui.doleta.gov/unemploy/pdf/uilawcompar/2021/complete.pdf#page=72. For historical average replacement
rates, see Figure 4. “Regular UI Wage Replacement Rate in the United States, 1938–2018,” in Christopher J. O'Leary
and Stephen A. Wandner, An Illustrated Case for Unemployment Insurance Reform, W.E. Upjohn Institute for
Employment Research, Upjohn Institute working paper, 19-317 , Kalamazoo, MI, January 22, 2020, p. 16,
https://research.upjohn.org/up_workingpapers/317/.
Congressional Research Service

4

link to page 7 link to page 7 Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

the $600 weekly FPUC supplement coupled with the underlying UI benefit was estimated to
replace more than 100% of pre-pandemic earnings for more than 75% of UI beneficiaries.31 The
estimated replacement rate for workers receiving the $600 FPUC varied significantly, with a
median replacement rate of 145%, and exceeding 300% for UI beneficiaries with the lowest 10%
of earnings.32
Federal Income Tax Withholding from UI Benefits
Since 1997, state UI agencies, which administer all UI benefits, have been required to offer
claimants receiving regular UC the opportunity to elect federal income tax withholding at the
time the claimant first files for UC benefits. 33 The option, if selected, must continue onto other
UC-based benefits (e.g., EB). Additionally, states are required to inform beneficiaries that state
UC and EB payments are included in their gross income for federal income tax purposes and that
they will receive IRS Form 1099-G to file with their income tax return. States have the option to
offer to withhold state income tax. Alternatively, individuals may opt to pay estimated federal
taxes on UC and EB benefits using IRS Form 1040-ES or pay such taxes when filing a federal
income tax return.
Under federal tax law, the current withholding rate for federal income tax is 10% of the gross UI
payment. The 10% rate applies to all filing statuses—single, married filing jointly, married filing
separately, head of household—and is not conditional on the number of dependents. Typically,
this low withholding rate would be sufficient to cover federal income tax liability for most
unemployed individuals, as they would be expected to have significantly lower income (due to
job loss and the average 30%-50% replacement rate of UI). However, it may not have been
sufficient when an individual’s UI income replacement was greater than their pre-pandemic
earnings (as was the case for a period in 2020—as discussed above in the “UI Replacement
Rates” section). As a result, during the periods when FPUC, MEUC, and LWA were
supplementing UI benefits, individuals with lower earnings histories may have been subject to a
higher federal income tax bracket in which the 10% withholding rate might have been insufficient
to prevent additional federal income tax being due.
Federal Tax Withholding: Pandemic-Related Benefits
Withholding requirements varied across the different pandemic-related UI programs.
 PEUC: States were required offer PEUC recipients the opportunity to elect
federal income tax withholding. DOL applied 26 U.S.C. Section 3304(a)(18) to
PEUC based on Section 2107(a)(4)(B) of the CARES Act, which required the
application of state and federal UC laws to PEUC claims and payments to the
extent practicable.34

31 Peter Ganong, Pascal Noel, and Joseph Vavra, "US unemployment insurance replacement rates during the
pandemic," Journal of Public Economics, vol. 191, no. 104273 (September 30, 2020),
https://www.sciencedirect.com/science/article/pii/S0047272720301377.
32 Ibid., Figure 3.
33 26 U.S.C. §3304(a)(18). Claimants who elect to have federal income tax withheld from their regular UC (and EB)
benefits must file IRS Form W-4V, Voluntary Withholding Request unless the state agency has its own form for
requesting federal income tax withholding; if so, the claimant should use that state form.
34 Information provided by email communication from DOL, ETA to CRS on March 2, 2021.
Congressional Research Service

5

link to page 10 Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

 PUA: States were not required to offer PUA recipients the opportunity to
withhold taxes. However, state agencies were required to inform PUA recipients
that these benefits would be included in their gross income for federal income tax
purposes and that they would receive IRS Form 1099-G to file with their income
tax return.35 Additionally, state UI agencies were encouraged by DOL to provide
a withholding option for PUA beneficiaries.
 FPUC and MEUC: States were required to offer individuals receiving FPUC
(and MEUC if applicable) the opportunity to withhold federal taxes.36 There is
some indication that not all states were able to meet this requirement.37
 LWA: States were required to notify individuals that LWA payments were subject
to federal income taxation but were not required to provide them with the option
to withhold federal income taxes from LWA payments.38
Data on UI Income from Federal Income Tax
Returns
The IRS publishes annual sample statistics related to “the operation of internal revenue laws”
through the Statistics of Income (SOI) program.39 Using the most recently available SOI data,
Table 1 shows the estimated number of federal income tax returns reporting unemployment
benefits by AGI in tax year 2019,40 during which 2.8% of tax returns filed reported UI income.41
Of returns reporting UI payment income, approximately 30% (1.29 million) were not taxable and
reported 26.2% of all UI payments. Taxpayers in this group did not owe income taxes and paid no
taxes on their UI benefits for tax year 2019.

35 DOL, ETA, “Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 – Pandemic Unemployment
Assistance (PUA) Additional Questions and Answers,” Unemployment Insurance Program Letter (UIPL) No. 16-20,
Change 2, July 21, 2020, see Question #5 on p. I-3, https://wdr.doleta.gov/directives/attach/UIPL/UIPL_16-
20_Change_2.pdf.
36 DOL stated that 26 U.S.C. Section 3304(a)(18) also applied to FPUC and MEUC; information provided by email
communication from DOL, ETA to CRS on March 2, 2021. Also see DOL, ETA, “Coronavirus Aid, Relief, and
Economic Security (CARES) Act of 2020 - Federal Pandemic Unemployment Compensation (FPUC) Program
Operating, Financial, and Reporting Instructions,” UIPL No. 15-20, April 4, 2020, see Section D.6 on p. I-6,
https://wdr.doleta.gov/directives/attach/UIPL/UIPL_15-20.pdf.
37 For example, according to the California Employment Development Department, “This withholding option was not
available for the $600 pandemic additional compensation payments, which needed to be quickly implemented at the
time to get benefit funding to eligible claimants in need of them”; see Megan Leonhardt, “Some Americans owe
thousands in taxes on enhanced unemployment benefits: ‘They threw us to the fishes’,” CNBC.com, March 2, 2021.
Also see Karin Price Mueller, “If you get the $600 expanded unemployment benefit, you may also have a tax issue,”
NJ.com, https://www.nj.com/coronavirus/2020/05/if-you-get-the-600-expanded-unemployment-benefit-you-may-also-
have-a-tax-issue.html.
38 Federal Emergency Management Agency (FEMA), “FEMA Supplemental Lost Wages Payments under Other Needs
Assistance,” Frequently Asked Questions, February 2022, p. 17,
https://www.fema.gov/sites/default/files/documents/fema_supplemental-lost-wages-payments-under-other-needs-
assistance_022022.pdf.
39 For more information on the IRS SOI program, see https://www.irs.gov/statistics/soi-tax-stats-purpose-and-function-
of-statistics-of-income-soi-program.
40 IRS SOI data for 2020 and 2021 are not yet available. IRS SOI data on individual income tax returns are made
available at https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-return-form-1040-statistics.
41 For 2019, an estimated 157,769,807 returns were filed (IRS SOI data 2019, Table 1.4).
Congressional Research Service

6

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Overall, among individuals with UI-covered job losses, an estimated 49.0% of UI income was
received by tax filers with an AGI of less than $50,000. In contrast, an estimated 16.8% of total
income for all taxpayers was reported on returns with an AGI of less than $50,000. Thus, UI
income is more concentrated than total income reported by lower- and moderate-income taxpayer
groups.
An estimated 21.0% of UI income went to tax filers with an AGI of at least $100,000 in 2019.42
States are prohibited from restricting UI benefit eligibility on account of income level except to
use income sources deemed related to unemployment. Thus, because general individual or
household income level would not be considered to impact the fact or cause of unemployment,
DOL requires that states pay compensation for unemployment to all eligible beneficiaries
regardless of their income level.43
Table 1. Tax Returns with Reported Unemployment Insurance Income, Tax Year 2019
UI Income

Number of Returns
(thousands)
Share of UI Income
Total returns
4,363,590
$21,395,491
100.0%
Nontaxable returns
1,290,181
$5,608,461
26.2%
Adjusted Gross Income (AGI) Category
Under $15,000
427,951
$1,388,204
6.5%
$15,000–under $30,000
965,945
$4,383,174
20.5%
$30,000–under $50,000
940,566
$4,711,128
22.0%
$50,000–under $100,000
1,220,445
$6,424,492
30.0%
$100,000–under $200,000
647,735
$3,469,142
16.2%
$200,000 and above
160,948
$1,019,354
4.8%
Source: Created by CRS using IRS Statistics of Income data 2019, Table 1.4.
Notes: AGI is total income minus statutory adjustments. Data are IRS estimates based on a sample of tax
returns. UI income is rounded to the nearest $1,000. IRS Table 1.4 applies the term “Unemployment
Compensation” when referring to UI benefits.
Amount of UI Benefits Withheld for Federal Income Taxes in 2020
and 2021
UI program data provide information on taxes withheld from UI benefits for 2020 and 2021.
According to DOL’s Employment and Training Administration (ETA) 2112 - UI Financial

42 States are prohibited from restricting UI benefit eligibility based upon an individual’s or household’s income level
because of a 1964 DOL decision that precludes states from means-testing to determine regular UC eligibility; see Letter
from Robert C. Goodwin, DOL administrator, to all state employment security agencies, October 2, 1964,
http://oui.doleta.gov/dmstree/uipl/uipl_pre75/uipl_787.htm. The determination was in response to a South Dakota law
that required longer waiting periods for unemployment benefits for individuals with higher earnings. The Labor
Secretary expanded the restriction on means-testing to severely limit the factors states may use to determine UC
entitlement. Under this interpretation, federal law requires entitlement to compensation to be determined from facts or
causes related to the individual's state of unemployment.
43 Although the above 1964 decision directly pertains to the UC program, all other UI programs except for Disaster
Unemployment Assistance (DUA) use the same eligibility requirements.
Congressional Research Service

7

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Transaction Summary Report,44 states reported that approximately 5.1% of all UI benefits were
withheld for the payment of federal income taxes in 2019.45 During the period when the majority
of COVID-19 UI benefits would have been paid, the percentage withheld decreased to
approximately 4.2% of all UI benefits in 2020 and to 4.1% in 2021.46 The lower percentages of
reported benefits withheld for the payment of federal taxes in 2020 and 2021 suggest that
COVID-19 UI claimants may have been less likely to have taxes withheld. This trend may be
attributable in part to states not being required to offer individuals who received PUA the option
to withhold federal income tax from those benefits. Also, as mentioned previously, some states
did not consistently offer to withhold federal income taxes from FPUC.47
Temporary Federal Income Tax Exclusions for UI
Benefits
Since it began to treat all UI benefits as fully taxable income, Congress has taken action twice to
exclude a portion of those benefits from taxable income. The first time was via the American
Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5, §1007), which included a temporary
exclusion on the first $2,400 of UI benefits per individual for federal income tax purposes. This
exclusion applied only for the 2009 tax year. The Joint Committee on Taxation (JCT) estimated
that this exclusion reduced federal receipts by approximately $4.7 billion.48
In the second, and more recent, instance, the American Rescue Plan Act of 2021 (P.L. 117-2,
§9042) allowed taxpayers to exclude up to $10,200 in UI benefits from income on their federal
tax returns in 2020. This exclusion was limited to taxpayers with modified AGI of less than
$150,000 and applied regardless of the taxpayer’s filing status (i.e., married filing jointly, married
filing separately, single, or head of household). In the case of married individuals filing a joint tax
return, this exclusion of up to $10,200 applied to each spouse. The legislative intent of the
exclusion was to mitigate unexpected taxes due to the $600 FPUC payment (as $600 x 17

44 CRS calculations of ETA 2112 data extracted on April 7, 2022; available at
https://oui.doleta.gov/unemploy/DataDownloads.asp.
45 In 2019, a total of $1.4 billion out of $27.9 billion in UI benefits were reported by the states as withheld for federal
income taxes. During 2019, these UI benefits predominately would have been UC payments as no state met their
requirements to trigger on to EB in 2019. This percentage would suggest approximately 45% of all beneficiaries opted
to withhold 10% of their UI benefits for federal tax purposes. States do not report to DOL on the amount of state taxes
withheld from UI benefits.
46 In 2020, a total of $22.9 billion out of $541.6 billion in UI benefits were reported by the states as withheld for federal
income taxes. In 2021, a total of $13.3 billion out of $323.2 billion in UI benefits were reported by the states as being
withheld for federal income taxes.
47 See footnote 35. Additionally, see “Why were you not able to withhold taxes from the $300 week per payments?” at
https://mn.gov/uimn/applicants/needtoknow/year-end-tax/.
48 The Joint Committee on Taxation, ERRATA“GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN
THE 111TH CONGRESS”, 111th Cong., 1st sess., March 23, 2011, JCX-20-11, p. 3.
Congressional Research Service

8

link to page 12 Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

weeks=$10,200).49 JCT estimated this exclusion would reduce federal receipts by approximately
$25.0 billion.50
Temporary Tax Exclusion Does Not Apply to 2020 Benefits Paid in 2021
One question regarding the 2020 exclusion relates to circumstances in which UI benefit payments
are delayed. UI benefit payments might be delayed for a variety of reasons, such as state
administrative delays and claimant appeals. The IRS has released guidance on this issue. If the UI
benefit was paid to the individual after 2020, the payment cannot be excluded from income tax
for 2020 even if the underlying (delayed) benefit was based on a period of unemployment in
2020.51
State Income Tax Withholding of UI Benefits
Most states have some form of personal income taxation (eight do not). In states with personal
income taxation, five do not consider UI benefits taxable income.52 Federal law allows but does
not require states to offer to withhold state income taxes from UI payments. Table 2 provides
information on state tax treatment of UI benefits, including whether the state offers to withhold
state income taxes from UI benefits and the state’s withholding rate.
Table 2. General State Income Tax Treatment of UI Benefits and Withholding Rate
Had State
State Typically
Withholds State
Income Tax in
Taxes UI
Income Tax from Withholding Rate
2020?
Benefits?
UI Benefits?
on UI Benefits

Alabama
Yes
No, with exceptions N/A
N/A
Alaska
No
N/A
N/A
N/A
Arizona
Yes
Yes
Yes
1%
Arkansas
Yes
Yes
N/A
N/A
California
Yes
No
N/A
N/A
Colorado
Yes
Yes
Yes
4%

49 Section 9042 of ARPA was based on S. 175 and H.R. 685 (117th Congress). In a press release for S. 175, Senator
Dick Durbin’s office directly linked the $10,200 of tax relief to the 17 weeks that the $600 FPUC benefit had been
available; see Office of U.S. Senate Democratic Whip Dick Durbin (D-IL), "Durbin, Axne Introduce Legislation To
Provide Tax Relief For Unemployed Americans," press release, February 2, 2021,
https://www.durbin.senate.gov/newsroom/press-releases/durbin-axne-introduce-legislation-to-provide-tax-relief-for-
unemployed-americans.
50 The Joint Committee on Taxation, Estimated Revenue Effects Of H.R. 1319, The “American Rescue Plan Act Of
2021,” As Amended By The Senate, Scheduled For Consideration By The House Of Representatives, 117th Cong., 1st
sess., March 9, 2021, JCX-5-22, p. 1, https://www.jct.gov/publications/2021/jcx-14-21/.
51 See A6 of IRS, “IRS updates 2020 unemployment compensation exclusion FAQs,” Fact Sheet FS-2022-21, March
2022, https://www.irs.gov/pub/taxpros/fs-2022-21.pdf#page=3, which states: “Q6. I was unemployed in 2020, but
payment of my unemployment compensation was delayed until 2021. Do I qualify for the unemployment compensation
exclusion? A6. No, the American Rescue Plan provides unemployment compensation exclusion relief only for
unemployment compensation received in 2020. The exclusion does not apply to unemployment compensation that was
received in 2021.” [Italics added.]
52 Indiana and Wisconsin exempt UI from taxation if a taxpayer’s federal AGI is under a base amount of either $18,000
(married filing jointly) or $12,000 (single, married filing separately and did not live with spouse for entire year). If
federal AGI exceeds the base amount, then the exemption is the lesser of UI received or 50% of the amount above the
base amount.
Congressional Research Service

9

link to page 14 link to page 14 link to page 14 link to page 14 link to page 14 Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Connecticut
Yes
Yes
Yes
3%
Delaware
Yes
Yes
No
No
District of Columbia Yes
Yesa
Yesa
5%a
Florida
No
N/A
N/A
N/A
Georgia
Yes
Yes
Yes
6%
Hawaii
Yes
Yes
Yes
5%
Idaho
Yes
Yes
No
N/A
Il inois
Yes
Yes
Yes
4.95%
Indiana
Yes
Special treatmentb
Yes
4%
Iowa
Yes
Yes
Yes
5%
Kansas
Yes
Yes
Yes
3.5%
Kentucky
Yes
Yes
Yes
4%
Louisiana
Yes
Yes
No
No
Maine
Yes
Yes
Yes
5%
Maryland
Yes
Yes
Yes
7%
Massachusetts
Yes
Yes
Yes
5%
Michigan
Yes
Yes
Yes
4.25%
Minnesota
Yes
Yes
Yes
5%
Mississippi
Yes
Yes
No
No
Missouri
Yes
Yes
No
No
Montana
Yes
No
N/A
N/A
Nebraska
Yes
Yes
Yes
5%
Nevada
No
N/A
N/A
N/A
New Hampshire
No, with exceptions N/A
N/A
N/A
New Jersey
Yes
No
N/A
N/A
New Mexico
Yes
Yes
No
No
New York
Yes
Yes
Yes
2.5%
North Carolina
Yes
Yes
Yes
Beneficiary choicec
North Dakota
Yes
Yes
Yes
2%
Ohio
Yes
Yes
No
N/A
Oklahoma
Yes
Yes
Yes
3%
Oregon
Yes
Yes
Yes
6%
Pennsylvania
Yes
No
N/A
N/A
Rhode Island
Yes
Yes
Yes
2.5%
South Carolina
Yes
Yes
Yes
7%
South Dakota
No
N/A
N/A
N/A
Tennessee
No
N/A
N/A
N/A
Congressional Research Service

10

link to page 14 link to page 14 Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Texas
No
N/A
N/A
N/A
Utah
Yes
Yes
Yes
5%
Vermont
Yes
Yes
Yes
2.4%
Virginia
Yes
No
N/A
N/A
Washington
No
N/A
N/A
N/A
West Virginia
Yes
Yes
No
N/A
Wisconsin
Yes
Special treatmentb
Yes
5%
Wyoming
No
N/A
N/A
N/A
Source: Created by CRS. Underlying citations are available to congressional clients upon request.
a. Beginning in 2021, UI benefits are exempt from taxation in the District of Columbia.
b. State has a UI exemption if a taxpayer’s federal AGI is under $18,000 (married filing jointly) or $12,000
(single, married filing separately and did not live with spouse for entire year). If federal AGI exceeds the
base amount of $18,000 or $12,000, then the exemption is the lesser of UI received or 50% of the amount
above the base amount. (This matches the now-repealed federal tax treatment first created in the Tax
Equity and Fiscal Responsibility Act of 1982 [P.L. 97-248]).
c. The beneficiary’s choice must be a whole percentage (e.g., 2.0% not 2.1%).
State Tax Responses to the Federal 2020 UI Benefit Exclusion
When the temporary $10,200 UI benefit tax exclusion for federal income taxes was enacted, some
states automatically followed that exclusion for their state income taxes in 2020, and others
enacted temporary income tax exclusions that were identical or similar. Table 3 lists whether a
state typically taxes UI income and whether the state tax treatment of UI benefits received in
2020 was temporarily changed. A total of 27 states (out of a potential 37) altered their 2020 tax
treatment of UI benefits. In addition, four states expanded these temporary exclusions to the 2021
tax year, and the District of Columbia permanently altered its tax law beginning in 2021 to
exclude UI benefits from taxable income.53
Table 3. State Income Tax Exclusion of UI Benefits in 2020 and 2021
Followed Federal
General State Tax
$10,200/Special Tax
Special Tax Exclusion

Treatment of UI Benefits
Exclusion in 2020?
in 2021?
Alabama
No UI taxation
N/A
N/A
Alaska
No income tax
N/A
N/A
Arizona
Taxes UI
Yes
No
Arkansas
Taxes UI
All UI excluded
All UI excluded
California
No UI taxation
N/A
N/A
Colorado
Taxes UI
No
No
Connecticut
Taxes UI
Yes
No
Delaware
Taxes UI
All UI excluded
All UI excluded

53 Government of the District of Columbia, Office of the Chief Financial Officer, 2021 District of Columbia (DC)
Individual Income Tax Forms and Instructions, D-40 All Individual Income Tax Filers, 2021, p. 2,
https://otr.cfo.dc.gov/sites/default/files/dc/sites/otr/publication/attachments/52926_D-
40_12.21.21_Final_Rev011122.pdf#page=2.
Congressional Research Service

11

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Followed Federal
General State Tax
$10,200/Special Tax
Special Tax Exclusion

Treatment of UI Benefits
Exclusion in 2020?
in 2021?
District of
Taxed UI
Yes
Permanent change: all UI
Columbia
excluded beginning in
2021
Florida
No income tax
N/A
N/A
Georgia
Taxes UI
No
No
Hawaii
Taxes UI
No
No
Idaho
Taxes UI
No
No
Il inois
Taxes UI
Yes
No
Indiana
Special treatment, partially
No
No
exempt
Iowa
Taxes UI
Yes
No
Kansas
Taxes UI
Yes
No
Kentucky
Taxes UI
No
No
Louisiana
Taxes UI
Yes
No
Maine
Taxes UI
Yes
No
Maryland
Taxes UI
Yes, additionally exempts
Exempts al UI benefits
al UI benefits for
for individuals making
individuals making
<$70,000 or married
<$70,000 or married
couples making
couples making
<$100,000
<$100,000
Massachusetts
Taxes UI
$10,400 exempt for
$10,400 exempt for
individuals with income
individuals with income
under 200% of the federal under 200% FPL
poverty level (FPL)a
Michigan
Taxes UI
Yes
No
Minnesota
Taxes UI
Yes
No
Mississippi
Taxes UI
No
No
Missouri
Taxes UI
Yes
No
Montana
No UI taxation
N/A
N/A
Nebraska
Taxes UI
Yes
No
Nevada
No income tax
N/A
N/A
New Hampshire
No UI taxation
N/A
N/A
New Jersey
No UI taxation
N/A
N/A
New Mexico
Taxes UI
Yes
No
New York
Taxes UI
No
No
North Carolina
Taxes UI
No
No
North Dakota
Taxes UI
Yes
No
Ohio
Taxes UI
Yes
No
Congressional Research Service

12

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Followed Federal
General State Tax
$10,200/Special Tax
Special Tax Exclusion

Treatment of UI Benefits
Exclusion in 2020?
in 2021?
Oklahoma
Taxes UI
Yes
No
Oregon
Taxes UI
Yes
No
Pennsylvania
No UI taxation
N/A
N/A
Rhode Island
Taxes UI
No
No
South Carolina
Taxes UI
Yes
No
South Dakota
No income tax
N/A
N/A
Tennessee
No income tax
N/A
N/A
Texas
No income tax
N/A
N/A
Utah
Taxes UI
Yes
No
Vermont
Taxes UI
Yes
No
Virginia
No UI taxation
N/A
N/A
Washington
No income tax
N/A
N/A
West Virginia
Taxes UI
Yes
No
Wisconsin
Special treatment, partially
No
No
exempt
Wyoming
No income tax
N/A
N/A
Source: Created by CRS. Underlying citations are available to congressional clients upon request.
a. The Department of Health and Human Services (HHS) determines the FPL guideline amounts annual y. The
2020 FPL is provided at https://aspe.hhs.gov/topics/poverty-economic-mobility/poverty-guidelines/prior-hhs-
poverty-guidelines-federal-register-references/2020-poverty-guidelines.

Author Information

Julie M. Whittaker
Katelin P. Isaacs
Specialist in Income Security
Specialist in Income Security

Acknowledgments
Sylvia Bryan and John H. Gorman, CRS Research Assistants, contributed to this report through the
collection of data on state taxation of UI benefits from numerous primary and secondary resources.
Congressional Research Service

13

Taxing UI Benefits: Federal and State Tax Treatment of UI Benefits During the Pandemic

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

Congressional Research Service
R47105 · VERSION 1 · NEW
14

Download PDF

Download EPUB

Revision History

May. 16, 2022

HTML · PDF

Metadata

Topic areas

Domestic Social Policy

Economic Policy

Report Type: CRS Report

Source: CRSReports.Congress.gov

Raw Metadata: JSON