Yes. You have to pay both federal and state income tax. You can elect to have taxes drawn from each unemployment check each week to avoid getting hit with a huge tax payable next year. On www.ncesc.com there is a form you can print (on the same form is the election to have your benefits deposited directly to your account rather than receiving that losable debit card). Use the search feature to find that form, fill it out, and fax or mail in. They automatically take 10% for Federal, and you can choose how much state they take out. However, it would be wise to find out first how much of a percentage of state tax you are accountable for. For example, I found mine to be 7.75% , so I hope to include at least 7% on the form to be taken out each week. Your state income tax rate depends on your benefit amount. Call your local unemp branch to find out how much your state income tax is...