Is Unemployment Taxable in NJ? IRS Rules and Withholding

Is unemployment taxable in New Jersey? At the state level, no — New Jersey excludes unemployment insurance benefits from gross income, so you owe the state nothing on them. At the federal level, yes — the IRS treats every dollar of unemployment compensation as taxable income you must report on your return.¹²

Why New Jersey Doesn’t Tax Unemployment

New Jersey law simply doesn’t count unemployment insurance when calculating what you owe the state. The exemption covers regular state unemployment benefits as well as federally funded extensions and supplemental payments distributed through the state system.³ There is no line on the NJ-1040 to report it and no form to file to claim the exemption. You leave the income off the return.

If you worked in New Jersey but live elsewhere, the benefits sourced from New Jersey are classified as nonreportable income on the NJ-1040NR nonresident return.⁴ Your home state may tax unemployment differently, so check its rules before assuming you owe nothing at the state level anywhere.

What the IRS Will Want

Federal law requires you to include every dollar of unemployment you received in your gross income for the year, regardless of which state paid it.⁵ How much you actually owe depends on your total income and filing status. If unemployment was your only income, the tax bite may be small. If you also had wages, the benefits stack on top and can push you into a higher bracket.

To put rough numbers on it: New Jersey’s maximum weekly benefit for 2026 is $905, and the maximum benefit period is 26 weeks, so a claimant drawing the full amount could collect up to $23,530 in a year.⁶ At the 12 percent federal bracket, that works out to roughly $2,824 in federal tax on the unemployment portion alone. Your actual bill depends on deductions, credits, and other income.

Getting Ahead of the Federal Bill

Taxes are not automatically withheld from unemployment checks, which is why so many claimants are surprised at filing time. You have two ways to stay current.

Voluntary Withholding

You can ask New Jersey to withhold a flat 10 percent of each unemployment payment for federal income tax by submitting IRS Form W-4V (Voluntary Withholding Request) to the Division of Unemployment Insurance.⁷ Ten percent is the only rate available. For many claimants it covers most or all of the eventual bill; higher earners may still owe more at filing.

Quarterly Estimated Payments

If you skip withholding and expect to owe at least $1,000 in federal tax after credits, you likely need to make quarterly estimated payments using Form 1040-ES. Estimated payments are generally required when withholding and refundable credits will cover less than 90 percent of your current-year tax or 100 percent of last year’s tax, whichever is smaller.⁸ If you had no tax liability at all in 2025 and were a U.S. citizen or resident for the entire year, you’re exempt from estimated payments for 2026.

Your 1099-G and Where the Numbers Go

Each January, the New Jersey Division of Unemployment Insurance issues Form 1099-G (Certain Government Payments) to anyone who received benefits during the prior year.⁹ You can download it by logging into your account at myunemployment.nj.gov and going to “My Account,” then “Tax Forms.” It’s posted no later than January 31.³

Two boxes drive your federal return. Box 1 shows the total unemployment paid to you during the year — that’s the figure you report as income. Box 4 shows any federal tax that was withheld, which counts as a credit toward your bill.¹⁰

On your federal return, enter the Box 1 amount on line 7 of Schedule 1 (Form 1040); it flows into your main Form 1040. If Box 4 shows withholding, enter that figure on line 25b of Form 1040.⁵ On your NJ-1040, enter nothing. The benefits don’t belong on the state return.

If the 1099-G is missing, wrong, or includes benefits you repaid, contact a Reemployment Call Center to request a paper copy or a correction.¹¹

How Unemployment Affects Your Credits

Unemployment benefits don’t count as earned income for the Earned Income Tax Credit, so they can’t help you qualify for or increase the EITC.¹² They do count toward your adjusted gross income, though, which the IRS uses to test whether you’re under the EITC income limits. Enough unemployment on top of wages can push your AGI past the threshold and knock you out of the credit entirely.

The same AGI effect hits the Premium Tax Credit for marketplace health insurance. A higher AGI generally means a smaller subsidy and higher monthly premiums. The modified AGI used for the credit starts with your AGI, which already includes unemployment under federal law, and adds only narrow categories like tax-exempt interest.¹³ No current special rule softens that effect, so plan for the full amount to count.

If You Have to Repay Benefits

New Jersey sometimes requires claimants to return benefits they weren’t entitled to receive. How you handle it on your federal return depends on the timing:

Repayment in the same year you received the benefits: subtract the repaid amount from the Box 1 total and report only the net on Schedule 1, line 7. Write “Repaid” and the dollar amount on the dotted line next to the entry.¹⁴
Repayment in a later year, over $3,000: you can either deduct the amount as an itemized deduction on Schedule A or claim a tax credit on Schedule 3. Calculate it both ways and use whichever saves more.¹⁴
Repayment in a later year, $3,000 or less: you generally can’t deduct it, because miscellaneous itemized deductions are currently suspended under federal law.¹⁴

Because New Jersey doesn’t tax the benefits in the first place, a repayment changes nothing on your state return. The adjustment is a federal matter only.

1
Justia. New Jersey Revised Statutes Title 54A – New Jersey Gross Income Tax Act
2
Office of the Law Revision Counsel. 26 USC 85 – Unemployment Compensation
3
Division of Unemployment Insurance. Federal Income Taxes on Unemployment Insurance Benefits
4
State of New Jersey. NJ-1040NR Instructions
5
Internal Revenue Service. Topic No. 418, Unemployment Compensation
6
Division of Unemployment Insurance. How We Calculate Benefits
7
IRS.gov. Form W-4V Voluntary Withholding Request
8
IRS.gov. Form 1040-ES (2026)
9
Internal Revenue Service. About Form 1099-G, Certain Government Payments
10
Internal Revenue Service. Form 1099-G Certain Government Payments
11
Division of Unemployment Insurance. FAQ: Paying Federal Income Tax on Your Unemployment Insurance Benefits
12
Internal Revenue Service. Earned Income and Earned Income Tax Credit (EITC) Tables
13
Office of the Law Revision Counsel. 26 USC 36B – Refundable Credit for Coverage Under a Qualified Health Plan
14
Internal Revenue Service. Publication 525, Taxable and Nontaxable Income