Are Unemployment Benefits Taxed?

With so many people out of work during the COVID-19 pandemic, and some rule changes increasing the number of people who qualify for unemployment benefits, the unemployment system has seen a massive spike in benefit payments. Since these benefits are paid by the government, and employees contribute to the system while they are working, do unemployment benefits need to be included in your gross income for tax purposes?

Unemployment benefits, including the extended benefits offered during the pandemic, are included in gross income for federal tax purposes. However, they are not taxable by the Commonwealth of Pennsylvania or local governments in PA.

The fact that unemployment benefits are taxable at the federal level may come as a surprise to some. You have the option to have 10% of your benefit payments withheld for federal income tax. But, with the huge increase in people eligible to receive benefits during 2020, some struggled to even get their benefits, much less ensure their tax withholding was correct. As a result, you may find that you owe tax with your 2020 federal income tax return related to the unemployment benefits you received without having tax withheld.

If you are receiving unemployment benefits now, you might consider asking the Office of Unemployment Compensation to withhold federal income tax from your benefit payments to avoid a surprise bill at tax time.

Schreiber Accounting and Advisory can help you get your taxes under control with comprehensive tax compliance and tax planning services. Contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.