Beware – Unemployment Benefits are Taxable

With the advent of the Covid-19 pandemic, many workers are applying for jobless benefits for the first time. One survey indicated many recipients are unaware that unemployment benefits are subject to federal income taxes as well as state income taxes in most states. There is also concern that individuals do not know that tax withholding is not automatic.

Unemployment recipients in Minnesota can request withholding when they sign up for the benefit. To start or change tax withholding, individuals can log on to their personal account at or phone 651-296-3644 in the Twin Cities or 1-877-898-9090 in greater Minnesota. Federal income tax is withheld at a rate of 10 percent.

In Massachusetts, recipients have the option of requesting that federal and/or state income taxes be withheld from weekly benefit payments when they sign up. Federal income taxes are withheld at a rate of 10%, and state income taxes are withheld at a rate of 5.1 percent.

Individuals can also fill out IRS form W-4V and return it to their local unemployment office to request that 10% of their benefit be withheld for federal tax.

Unemployment recipients should also be aware that unemployment compensation does not count as earned income for purposes of the earned income tax credit (EITC), which could result in some households not receiving a credit or receiving a smaller credit than they have collected in the past.

The IRS encourages taxpayers to do a withholding checkup whenever they have a change in their personal financial situation. Tax preparers also suggest people receiving unemployment benefits do a mid-year check-up of their income and taxes and adjust if necessary.