Unemployment Benefits and Taxes

Unemployment Benefits Are Taxable: What You Need to Know

Between February and March of 2020, the number of Americans who filed for unemployment benefits rose from 6.5 percent to an unprecedented 14.7 percent. This is an all-time high for the nation, and although unemployment rates have started to come down, everyone who received benefits will have to take them into account when they file their taxes. That means that more than 60 million Americans will report unemployment insurance benefits as income on their 2020 tax return.

Unemployment Benefits are Taxable

By law, all unemployment insurance compensation is taxable and needs to be reported on a 2020 federal income tax return. According to the IRS, taxable benefits include state-provided unemployment insurance and any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.

How to Pay Taxes on Your Benefits

Paying Upfront

When you applied for unemployment benefits you had the option to set up withholding so that your federal income taxes would be deducted before the money was dispersed. If you chose this option and completed a W4-V Voluntary Withholding Request then you chose to have a flat 10% fee withheld from your benefits to cover your tax liability. Depending on your state of residence you may also have had the opportunity to fill out a state-issued withholding form. 

Paying Quarterly

If you didn’t fill out a withholding form or withhold less than what you owe, you can opt to make quarterly tax payments to gradually pay off your tax penalty. You can use the IRS Tax Withholding estimator to have taxes withheld from your benefits or current pay if you’ve returned to work.

Quarterly taxes are paid on the 15th of the month following the end of the quarter. For example taxes for Q4 of 2020 will be due on January 15, 2021.

For more information, you can find these helpful worksheets: Form 1040-ES and Publication 505, on IRS.gov.

Paying a Year-End Tax Bill

In January 2021 everyone who received unemployment benefits will receive a 1099-G Form from the agency that paid their benefits. This form includes the total amount of benefits received in 2020 and the amount, if any, that was withheld to cover taxes. You can report the information on this form along with your W-2 income when you file your 2020 tax return.

How Much do I Have to Pay?

Everyone who chose to withhold federal income taxes in advance will pay a 10% flat rate. Once you complete your 2020 tax return your actual tax rate will be calculated based on your income bracket. If you overpaid in withholding any overages will be processed as a tax return. 

State income taxes are handled on a state by state basis. Some states do not require income taxes on unemployment benefits.

States that do not collect income taxes on unemployment benefits include:  

Alabama, Alaska, California, Florida, Montana,  Nevada, New Jersey, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Wyoming and Washington.

If you live in one of these states you do not need to pay income taxes on your unemployment benefits but you should still report what you received on your 2020 tax return so that your federal income taxes are accurate.

Will Stimulus Check Affect my Taxes?

No. While there is a relationship between the stimulus check and your taxes it won’t affect what you owe or what you receive in a refund. Unlike unemployment benefits, the stimulus check is not considered income. The stimulus checks were dispersed by the IRS using the same process that is used for tax returns. This explains why people who had not filed a tax return in the past year needed to fill out special paperwork to receive their funds. 

For more information about unemployment benefits visit your state’s Department of Labor website

For more information about your taxes visit IRS.gov.

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