Back to Articles
Personal Tax4 min readMar 17, 2026
Taxes on Unemployment Income
Many people don't realize that unemployment benefits are taxable income. Here's how unemployment compensation is taxed and how to handle it.
Taxes on Unemployment Income
Unemployment Is Taxable
Unemployment compensation is fully taxable as ordinary income at the federal level. It's reported on Form 1099-G.
Withholding Option
You can request voluntary federal tax withholding from your unemployment benefits:
- Request 10% withholding via Form W-4V
- Helps avoid a surprise tax bill
State Taxation
Most states tax unemployment benefits. A few states (including some that have no income tax) do not.
Illinois: Unemployment benefits ARE taxable at the state level.
What Counts as Unemployment Income
- State unemployment insurance (UI)
- Extended benefits
- Pandemic-related unemployment benefits (when applicable)
- Trade readjustment allowances
Effect on Other Benefits
Unemployment income counts toward:
- AGI for determining deduction eligibility
- EITC earned income thresholds (unemployment is NOT earned income, so it doesn't count toward EITC)
- Premium Tax Credit eligibility for ACA marketplace insurance
What If You Didn't Withhold Enough?
Pay any amount owed by April 15. If you'll owe significantly, consider making an estimated tax payment.
Received unemployment this year? Make sure it's properly reported and planned for.