All your questions about unemployment and taxes, answered

  • Unemployment benefits are generally taxable by the federal government and sometimes states.
  • You can pay taxes on unemployment through a 10% withholding or estimated quarterly payments.
  • A new federal bill, if passed, would waive taxes on the first $10,200 of benefits for many people.
  • Visit Personal Finance Insider for more stories.

In 2020, the number of Americans collecting unemployment insurance skyrocketed. 

Through the passage of multiple relief packages, the federal government directed states to boost jobless people’s weekly checks and extend the duration of the payouts. The aid has helped millions of people get by during COVID-19 lockdowns.

While unemployment benefits are typically taxable by the federal government, and in some cases states, another relief package that’s on track to be approved by Congress this week proposes waiving federal taxes on the first $10,200 of benefits for some people.

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Here are answers to common questions around unemployment and taxes.

Is unemployment taxable?

Generally, yes. Unemployment benefits must be reported on your federal tax return following the year you collected the money; it will be included in your federal gross income. You have options to pay taxes throughout the year. If you don’t, you may wind up with a big bill at tax time.

You might also have to report unemployment benefits on your state return if the state taxes income.

You can quickly find the amount your state paid to your name in unemployment benefits in 2020 by looking at Box 1 on Form 1099-G, which should have been mailed to you by now or made available online. In Box 4, you’ll see the amount that was withheld for federal taxes, if any. These are the numbers you need to report on your tax return.

The federal aid packages opened up eligibility to self-employed workers and other groups and authorized bonus payouts for anyone collecting state benefits. Regardless of which program you qualify for and where the money comes from, it’s all considered unemployment compensation in the eyes of the IRS.

Are taxes on unemployment being waived?

Some relief may be on the way. The Senate approved a bill on March 6 to waive income taxes on the first $10,200 in unemployment benefits for people who earned up to $150,000 in 2020.

The House is expected to pass the legislation this week and send it to President Joe Biden for final approval.

What if I already filed and paid taxes for 2020?

If you file a tax return and your filing status, income, or deductions for that tax year change, you can generally file an amended return within three years to correct it.

If the federal government does approve the provision to waive federal taxes on the first $10,200 in unemployment compensation in 2020, the IRS will likely release specific instructions for those who qualify but already filed a tax return. Stay tuned.

How is unemployment taxed?

Unemployment insurance is a joint state-federal government program. People apply for benefits through their state government and get paid by the state. At tax time, states mail Form 1099-G (Certain Government Payments) to the address associated with a claim, or make the form available online, so the taxpayer can report the income on their tax return. The IRS also gets a copy.

Most states that tax income give people a choice of how to pay taxes on unemployment benefits — either through withholding or estimated quarterly payments. 

If you want your taxes automatically taken from your benefit check or direct deposit before you get paid, like they would be from a traditional paycheck, then you need to file Form W-4V (Voluntary Withholding Request). This will instruct the payor — most likely your state government — to withhold 10% of each payment for federal income taxes. It will also take a portion of the money for state taxes, if applicable.

The other option is to make quarterly payments directly to the IRS for the amount you estimate you’ll owe. Keep in mind that this method requires doing some calculations, meeting payment deadlines every three months, and may result in a penalty charge if you underpay.

Visit your state tax agency website to see what options are available to you.

Will I get a tax refund if I was on unemployment?

It depends what other income you had and whether you already paid taxes on the unemployment benefits. 

Tax refunds generally mean you paid more than you owed in taxes or you paid the right amount but you qualify for additional deductions or credits on your tax return that reduce your overall tax liability. In either case, the IRS will refund your money.

Is unemployment extended?

Most states typically pay benefits for 26 weeks, or about six months, though it varies depending on where you live.

Since the onset of the COVID-19 pandemic, the federal government has stepped in multiple times to extend the maximum payout period, add extra money to weekly checks, and loosen the eligibility requirements to qualify for benefits. 

The CARES Act, passed in March, extended state payouts by 13 weeks and added $600 to each weekly check; those benefits lapsed in July. Another bill approved in December added 11 weeks and $300 to each check. Those benefits are set to expire March 14, but Congress is getting closer to approving another extension.

If the current version of the legislation is approved, the maximum benefit period would be extended through September and the $300 bonus payout per check would continue.

How do I apply for unemployment?

To apply for unemployment insurance, visit CareerOneStop.org and select your state for specific instructions. It typically takes two to three weeks of processing time after you file your claim to get your first payment, according to the Department of Labor. Depending on the state, you can choose to receive your payment as a direct deposit, check, or debit card.

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