Do you have to pay unemployment back in taxes

Unlike traditional employment, where taxes are withheld from your paycheck, you're not required to have federal taxes withheld from your benefit payments. Unless you opted to have taxes withheld, you could end up owing taxes when you file your tax return.

Do you have to pay state taxes on unemployment?

Maybe. If your state of residence collects income taxes, you may have to pay taxes on your benefits to both state and federal governments. That noted, there are a few states that waive unemployment income taxes. They are:

• California
• Montana
• New Jersey
• Pennsylvania
• Virginia

Indiana and Wisconsin both offer partial exclusions.

How do I know if I already paid taxes on my unemployment benefits?

If you received unemployment insurance this year, you'll receive a Form 1099-G, which shows how much money you received from your unemployment benefits. It will also show whether or not you elected to withhold taxes and, if so, how much was withheld.

How to avoid a large tax bill in the future

Whether or not you decide to withhold taxes from your unemployment benefits depends on your financial situation. If you need the full payment to get by, it may sound appealing to put off paying taxes in the hope of being in a stronger financial situation later on. That noted, it can be devastating to get hit with a big tax bill in the spring. 

Your options include making estimated quarterly tax payments in advance, having your taxes automatically withheld from each payment or paying in full when you file your tax return the following year.

Many sole proprietors and freelancers make estimated quarterly tax payments, which lets you spread out what you owe into four annual payments. That noted, because these payments are based on your estimated total income, you could end up paying too much -- resulting in a refund -- or too little -- which would require an extra payment come the April 18 deadline. 

To have your unemployment checks taxed like a regular paycheck, you can fill out Form W-4V. Since taxes will be withheld from each payment, it will reduce the amount you receive weekly, but can prevent you from owing a hefty tax bill the following tax season.

Tax season is officially here. And those who collected unemployment benefits in 2021 may be in for an unwelcome surprise.

While a federal tax break on jobless benefits was available during last year's tax season, the same isn't true this year.

Since unemployment benefits count as taxable income, recipients who didn't have tax withheld from their unemployment payments (or didn't have enough withheld) in 2021 may owe money to the IRS or get a smaller-than-expected tax refund.

The American Rescue Plan Act, a pandemic relief law, waived federal tax on up to $10,200 of unemployment benefits per person collected in 2020, a year in which the unemployment rate spiked to levels unseen since the Great Depression.

Households qualified for the federal waiver if their income (minus benefits) was under $150,000.

More from Personal Finance:
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How IRS transcripts can help this tax season

However, Congress hasn't approved a similar tax break for 2021 benefits — which may surprise taxpayers when they file their income tax returns. Tax season starts Jan. 24 and runs through April 18.

Approximately 25 million people collected jobless benefits last year, according to Andrew Stettner, a senior fellow and unemployment expert at The Century Foundation.

By comparison, roughly 40 million people got benefits in 2020, collecting $14,000 each, on average, according to The Century Foundation. However, less than 40% of payments had taxes withheld, the group estimated.

Of course, Congress could pass legislation during tax season offering a tax break to unemployment recipients. That's what happened last year — Democrats passed the American Rescue Plan Act in March, and has since issued retroactive tax refunds to millions of people who'd filed their returns before the measure became law.

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However, lawmakers don't seem poised to offer another reprieve.

The U.S. economy and job market have rebounded significantly since early 2021. Claims for unemployment benefits at the end of December had fallen to pre-pandemic levels. The national unemployment rate is 3.9%, its lowest level since February 2020.

That's not to say the labor market has fully recovered. Employment is still 3.6 million jobs below its pre-pandemic baseline, and nearly 2.3 million people have left the labor force.