With more than 48 million Americans filing for unemployment insurance over the past 15 weeks and millions getting an additional $600 weekly benefits under the CARES Act on top of their base state benefits, many will have to consider how those payments could affect their taxes.
Unemployment insurance is a joint state-federal program and those Americans who have benefited from it will have to pay federal and state taxes on it because those benefits are considered income by the Internal Revenue Service.
While you might not need to include unemployment benefits in this year’s tax return — unless you claimed the benefits in 2019 — experts advise it’s better to start thinking about it now even if you have to do it next year.
“When they go to file next year, a lot of people will be surprised that they either get a smaller refund than they expected or that they'll have a balance that they normally don't have,” said Nathan Rigney, lead tax research analyst at H&R Block. “And it'll come at a time when people are in a no better position to pay out-of-pocket expenses than they are today.”
How much tax do you pay on it?
How much tax you’re going to pay on your unemployment benefits depends on the federal and state tax rate. While the federal tax rate for unemployment benefits is 10%, the state one varies from 4% to 10%.
In some states, you’ll only have to pay the federal tax. Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — levy no personal income tax. Additionally, California, New Jersey, Oregon, Pennsylvania, and Virginia exempt unemployment benefits from tax.
How to pay taxes on unemployment?
The three most common ways to pay those taxes include: paying them when you file your tax return, making estimated payments during the year, or having them automatically withheld — which experts say is often the best option.
“If people have the capacity, they have the cash flow, and they think that they can
forgo a little bit of their unemployment check each week, it's so much easier to do the small incremental withholding amount than it is to come up with a large payment out of pocket,” Rigney said.
When you first apply for unemployment, you should have the option to elect automatic withholding. If you didn’t do this, you can do this by filing a W-4V, or Voluntary Withholding Request, to have your state and federal taxes withheld automatically from your unemployment check.
By Jan. 31, you’ll receive a Form 1099-G, or Certain Government Payment, from your state, listing the amount of payment you’ve received and the amount withheld, if applicable. You should use that form to fill out your tax returns.
You can also pay quarterly tax payments to the IRS throughout the year on your unemployment income. This can help you avoid any penalties for not paying enough tax to the federal government during the year. But this option is very onerous. You must estimate these payments and make four deadlines during the year for payments. You also have to submit separate payments to the state and federal government. If you still think this is the right option for you, check out the IRS guidance on payments.
Last, you can wait until tax day to make your full tax payment. But if you received unemployment for much of the year, you may be subject to penalties for not paying enough tax during the year through withholding or estimated payments. You also could face a huge tax bill in April that could create a cash crunch. It’s better to plan ahead.
Read more information and tips in our Taxes section