Do you pay taxes on money market accounts? How to know what you might owe.

Earning interest on your savings may feel like free money. And it is in a sense — though it usually comes with a tax bill.

If you keep cash in a money market account (MMA), the interest your balance earns is generally considered taxable income, even if you never withdraw it. Understanding how money market account interest is taxed and how to report your earnings can help you avoid surprises during tax season and stay compliant with IRS rules.

Do you pay taxes on money market accounts?

Only a portion of the money in your MMA is taxable. The principal balance — or the money you personally deposited — is not taxed because you already paid income taxes on that money before adding it to your account.

However, the interest you earn on your balance is considered taxable income. You must pay federal taxes on your earnings each year. And depending on where you live, you may need to pay state taxes as well.

If you earn $10 or more in interest in a calendar year, your bank or credit union should  send you a Form 1099-INT, Interest Income, which details the total amount of interest income earned that year. You must report that interest on your taxes — whether or not you withdrew the funds.

But what if you didn’t receive a 1099-INT? Unfortunately, you’re still expected to report all interest income at tax time.

Read more: The 10 best money market accounts and rates available today

How to report money market account interest

You can typically view your year-to-date (YTD) interest earnings by logging into your online banking account or reviewing your most recent bank statement.

However, as mentioned, you should receive a Form 1099-INT if you earned $10 or more in interest during the tax year. In some cases, you may need to download the form from your online account or request it directly from your bank. But remember: Even if you don’t receive a 1099-INT, you’re still responsible for reporting any taxable interest earned to the IRS.

When filing your taxes, report the amount listed in Box 1 of Form 1099-INT on the taxable interest line of your tax return. If you earned any tax-exempt interest listed in Box 8, report that amount on the tax-exempt interest line. You should also include any federal income tax withheld shown in Box 4. Once you’ve finished filing your return, save your 1099-INT with the rest of your tax documents for safekeeping in the event of a future IRS audit.

How much tax will you owe?

Interest earned from an MMA is typically taxed as ordinary income, which means it’s taxed at the same federal income tax rate as your wages or salary. The exact amount you’ll owe depends on your total taxable income and federal tax bracket, as well as whether your state taxes interest income.

You can estimate how much you may owe by multiplying your earned interest by your marginal tax rate. Keep in mind that earning interest could also slightly increase your total taxable income, which may affect eligibility for certain tax credits or deductions in some cases. If you’re unsure how your interest earnings may impact your taxes, consider consulting a tax professional.