10 Mar High Tax Bill in 2020? Here’s Why!
Yes, by tax law, unemployment benefits are taxable at the federal level (and the state level in most cases). This includes any taxable benefits received under disaster relief legislation such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The agency that disburses your unemployment compensation does not automatically withhold taxes from your unemployment benefits in most cases. This may lead you to believe that your benefits are not taxable. This unfortunately is an incorrect assumption!
The CARES Act provided unemployed taxpayers with an additional $600 per week benefit from March 27, 2020, through July 25, 2020. In some cases, an extra pandemic-related $300 per week was paid after July 25th for a limited period of time. The $600 and $300 benefits were in addition to any regular unemployment benefits (income) paid by the state unemployment agency.
How Are Unemployment Benefits Taxed by the IRS?
The IRS considers unemployment benefits to be ordinary income, similar to wages earned from an employer. The biggest difference between wages earned and unemployment income for tax purposes is that unemployment income is not subject to Social Security and Medicare taxes like regular employment wages are.
The IRS requires that you report any unemployment income earnings on your tax return in the year the benefits are received.
Do I Have to Pay State Taxes on My Unemployment Income?
For the most part, state law follows federal rules when it comes to the taxability of unemployment benefits.
However, there are a few states that do not currently tax unemployment benefits:
- California
- Indiana (50% of the benefit over $12,000 [single] and $18,000 [married])
- Montana
- New Jersey
- Oregon
- Pennsylvania
- Virginia
- Wisconsin (50% of the benefit over $12,000 [single] and $18,000 [married])
This is in addition to the states which currently have no income tax: Alaska, Florida, New Hampshire (no wage tax), Nevada, South Dakota, Tennessee (no wage tax), Texas, Washington, and Wyoming.
You should consult with your local tax authority to determine whether estimated taxes are required.
In addition, you should work with your unemployment benefits provider to determine whether there is an option for state taxes to be withheld.
How Do I Pay Taxes on My Unemployment Income?
Federal and state taxes are not automatically withheld from your unemployment earnings – but you can request withholding.
To have taxes withheld from your unemployment benefits, you can complete Form W-4V, Voluntary Withholding Request, and submit it to the agency providing you with your benefits (not the Internal Revenue Service). This will allow the agency to withhold 10% of your benefits in federal taxes on your behalf. However, depending on your total income, this withholding alone may not be sufficient to cover all of the tax on your unemployment income.
If you have not had taxes withheld or made any estimated tax payments on your unemployment benefits, you could be in for an unwanted surprise come tax time. In addition to owing taxes on the full amount of the unemployment compensation you received, you may also be subject to interest and penalties for failing to pay taxes at least quarterly on the income received.
The Internal Revenue Service maintains that taxpayers must pay taxes on income earned as they receive payment. This typically means either withholding from their payment or remitting estimated taxes to the IRS.
The IRS has a worksheet included with Form 1040-ES, Estimated Tax for Individuals that can assist you in determining the amount of anticipated taxes to be paid. If you have concerns about making the calculations, consider seeking tax assistance.
What If I Haven’t Paid Any Taxes on My Unemployment Income?
If you haven’t had any taxes withheld from your unemployment benefits or made any estimated tax payments thus far, now is the time to take action if you believe you will owe $1,000 or more in taxes.
If you haven’t made any tax payments so far, consider making estimated tax payments to catch up. You may also want to consider having taxes withheld directly from the remainder of your unemployment benefits for the year.
For questions regarding the taxability of unemployment benefits, methods of paying taxes on unemployment benefits, estimating your tax liability, contact your tax professional.
Final Thoughts
Many people don’t know that unemployment benefits are taxable income. Worse yet, state unemployment offices do a poor job of informing recipients about this. If you lived on unemployment benefits in 2020 due to job loss and didn’t have taxes taken out, you, unfortunately, are going to have an awful surprise when getting your taxes done this year. Please remember, your tax preparer is only doing their job, so don’t “shoot the messenger” if you have a larger than normal tax bill this year due to unemployment income. For more helpful tips and information on becoming a successful Entrepreneur, subscribe to our weekly blog at The Biz Wizards.
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