Yes, Maryland does tax unemployment benefits. Every dollar you collect from the Maryland Division of Unemployment Insurance is taxable at the federal level, on your Maryland return, and by the county (or Baltimore City) where you live. There is no state exclusion or exemption. Between the three layers, expect roughly 8% to 10% of your benefits to go to taxes if unemployment is your only income, and more if you have other household earnings stacking on top.
Why Your Benefits Are Taxable in Maryland
Federal law counts unemployment compensation as gross income, the same as wages.1Office of the Law Revision Counsel. 26 USC 85 – Unemployment Compensation Maryland then builds its own tax on top of the federal number: the state calculates your Maryland adjusted gross income by starting with your federal AGI and applying a limited set of adjustments.2New York Codes, Rules and Regulations. Maryland Code Tax-General 10-203 Unemployment is never subtracted in those adjustments, so it flows straight through into Maryland taxable income. The Maryland Department of Labor confirms benefits are subject to both federal and state income tax.3Maryland Department of Labor. 1099-G Income Tax Form – Reporting Unemployment Insurance Benefits
A temporary federal exclusion let some 2020 filers shield up to $10,200 during the pandemic. That provision expired, Maryland never enacted a state version, and no similar break exists for 2025 or 2026 returns.
The Maryland Rate Most Claimants Pay
Maryland’s income tax is progressive. For a single filer, the first $1,000 is taxed at 2%, the next thousand at 3%, the next at 4%, and then 4.75% covers income from $3,001 up to $100,000. Higher brackets top out at 6.5% above $1 million.4Comptroller of Maryland. Withholding Tax Facts January 2026
In practice, most people on unemployment sit in the 4.75% bracket. Maryland’s maximum weekly benefit is $430, which comes to about $22,360 over a full year of payments.5Maryland Department of Labor. How to Apply for and Collect Benefits Unemployment alone rarely pushes a single filer past that tier. If a spouse works or you had wages earlier in the year, the household total could reach a higher bracket, and your unemployment dollars are the ones sitting at the top of the stack.
Your County Adds Its Own Tax
Maryland is unusual in letting counties tax income directly. Every county and Baltimore City charges a flat local income tax on your Maryland taxable income. For 2026, rates run from 2.25% in Worcester County to 3.30% in Dorchester and Kent counties, with most jurisdictions at 3.20%.6Department of Legislative Services. 2026 County Local Tax Rates You pay the rate for the county where you live on December 31, not where you worked or filed your claim. There is no local exemption for unemployment.
What the Combined Bill Looks Like
Take a single filer in a 3.20% county who collects $20,000 in benefits and has no other income:
- Federal: after the 2026 standard deduction of $16,100, only $3,900 is taxable. At the 10% rate, federal tax is about $390.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- Maryland state: after the state’s smaller standard deduction (currently capped around $3,350 for single filers), most of the benefits land in the 4.75% bracket, producing roughly $700 to $800.
- Local: at 3.20%, another $530 to $640.
That is roughly $1,600 to $1,800 on $20,000 in benefits, or an effective combined rate near 8% to 9%. Add wages from a spouse or a severance payout and your marginal rate on the unemployment portion climbs. In higher-income households, the state and local piece alone on those benefit dollars can approach 9.80% before federal tax enters the picture.
Withholding Through BEACON
The easiest way to stay ahead of the bill is to have taxes taken out of each weekly payment. You can elect federal withholding at a flat 10% through BEACON, the online system Maryland uses to run unemployment claims. Maryland state withholding is also available through the same portal. You can set both up when you first file or change your election later by logging into BEACON.
The math is straightforward. On a $400 weekly benefit, 10% federal withholding pulls $40 per week. Adding state withholding shrinks the check further. That reduction is painful when you are already trying to cover rent, but the alternative is owing $1,500 or more at once the following April, when the money is even less likely to be available.
Estimated Payments If You Skip Withholding
If you would rather receive the full weekly amount, you can send quarterly estimated payments to both the IRS and the Comptroller of Maryland. Federally, if you expect to owe $1,000 or more after withholding and credits, you should be paying estimates.8Internal Revenue Service. Estimated Tax for Individuals For Maryland, you use Form PV, the state’s payment voucher.9Comptroller of Maryland. Individual Tax Forms and Instructions Payments are due April 15, June 15, September 15, and January 15 of the following year. If your unemployment starts mid-year, you begin paying for the quarter when the income starts.
Estimated payments demand more of you: projecting the year’s income, calculating tax, splitting the total into installments, and remembering four deadlines. Most claimants find withholding simpler.
Penalties for Falling Short
If you pay too little across the year, both governments charge you for it. Federally, you avoid the underpayment penalty by paying at least 90% of the current year’s tax or 100% of last year’s tax, whichever is smaller; if you owe less than $1,000 after withholding and credits, no penalty applies.10Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
Maryland charges a 5% penalty on tax not paid by the filing deadline, plus interest running from the due date. If the Comptroller later assesses additional tax, interest accrues at 6% per year. Those charges stack, so a $1,500 shortfall grows if you leave it alone.
Don’t Count on the Earned Income Tax Credit
If unemployment is your only income, you may assume you qualify for the EITC. You don’t. The IRS excludes unemployment compensation from earned income; only wages, salaries, tips, and self-employment count.11Internal Revenue Service. Earned Income and Earned Income Tax Credit (EITC) Tables That matters twice in Maryland, because the state EITC is worth 50% of the federal credit.12Maryland Department of Human Services. Earned Income Tax Credit Lose the federal credit and the state credit goes with it. If you worked earlier in the year, those W-2 wages still count and you may qualify on that basis. A full year on unemployment with no other earnings disqualifies you.
Filing With Your 1099-G
By the end of January, the Maryland Department of Labor issues Form 1099-G to everyone who received benefits the prior year. Box 1 shows the total benefits paid; Box 11 shows any state tax withheld.3Maryland Department of Labor. 1099-G Income Tax Form – Reporting Unemployment Insurance Benefits You can pull the form from BEACON rather than waiting on a mailed copy.
You report the income on Form 502, Maryland’s resident return.13Comptroller of Maryland. Maryland Form 502 – Resident Income Tax Return The unemployment amount is already included in your federal AGI, which carries over to line 1 of Form 502, so you do not enter it separately. Just confirm the federal AGI on your Maryland return matches your federal return. The Comptroller’s free iFile system handles Form 502 electronically and returns a confirmation number immediately.14Comptroller of Maryland. iFile Choose Form Entrance Tax year 2025 returns are due April 15, 2026.15Comptroller of Maryland. What’s New for the 2026 Tax Filing Season (2025 Tax Year)