Taxes are indeed due on unemployment benefits.
Benefits from unemployment insurance are treated as income, just like wages, and must be disclosed on your federal tax return. Depending on where you live, you might or might not have to report your unemployment benefits on your state tax return. On top of that, you have to pay federal taxes on your unemployment compensation.
Your tax refund might be lower this year than in prior years if you received unemployment benefits. Your tax refund can be reduced if the taxes you owe were paid out of it because you failed to pay taxes on your unemployment benefits as you got them.
Stimulus Checks and Expanded Unemployment Benefits
Millions of Americans have lost employment due to the COVID-19 pandemic, which has caused great economic hardship. Congress responded by passing significant legislation that increased unemployment benefits and distributed direct stimulus payments to alleviate the financial crisis. The critical distinction is that although unemployment insurance is subject to taxation, stimulus payments are not.
Unemployment Federal Tax Break
Last year, the American Rescue Plan provided a federal tax cut on unemployment compensation. As a result, if your adjusted gross income (AGI) was less than $150,000 in 2020, you didn’t have to pay federal tax on the first $10,200 ($10,200 per person if you are married, filing jointly) of your unemployment benefits for Tax Year 2020 (taxes filed in 2021). Whether you are filing as a single person or a married couple, the $150,000 income cap applies.
How do Unemployment Taxes work?
Unemployment Taxes at the Federal Level
At the federal level, your income, including your earnings, salaries, bonuses, etc., is counted and taxed following your federal income tax bracket.
Most income, including wages, is subject to pay-as-you-go taxes. You must pay taxes on your income as you receive it when you receive compensation. As an employee, your federal income and Social Security taxes are typically withheld from a portion of your paycheck. Federal income taxes are not routinely deducted from unemployment benefits like they are from earnings.
Your unemployment compensation is subject to taxation. You have three options for paying your federal taxes: paying the tax in total when it’s due and paying the projected tax installments every quarter.
Unemployment Taxes at the State Level
You could pay state income taxes on your unemployment benefits and federal income taxes if you reside in a state that levies one.
You won’t have to pay state income taxes on your unemployment benefits if your state doesn’t have one or doesn’t consider them to be taxable income.
Unemployment Taxes at the Local Level
Depending on where you live, your city or county may also tax your unemployment benefits at the local income tax rate. Get in touch with your state, county, or municipal unemployment agency to learn more about local taxes and unemployment benefits.
How do I pay my unemployment taxes?
Paying Unemployment Taxes at the Federal Level
You have three options for paying the federal income taxes you owe on your unemployment compensation. It can be best to pay the entire amount at tax time if you don’t anticipate your benefits to increase any tax you owe significantly. You can prevent receiving a big tax bill by choosing one of the following options.
- Request that your state’s employment agency withhold your federal taxes. Similar to withholding taxes from a regular payment, withholding your taxes means that a fixed 10% of your unemployment checks will be used to pay federal taxes.
When you initially apply for unemployment benefits, you can have your taxes withheld. You can also start withholding taxes by completing Form W-4V, Voluntary Withholding Request, and submitting it to the organization responsible for paying you your unemployment benefits. Visit the IRS website to obtain Form W-4V, Voluntary Withholding Request, or request it from your unemployment agency. Then, use the withholding form provided by your organization if one exists.
Whenever you are requested to certify for your benefits, you can alter your withholding on a biweekly basis (online or by mail), depending on your state. Depending on your financial condition, you can choose to withhold at specific times and not at other times in states where you can adjust your withholding on a biweekly or regularly. For information about your choices for withholding, contact the state unemployment office. However, they may do so for average state benefits. It should be noted that certain states have been unable to provide federal withholding on emergency unemployment compensation established by Congress.
To be sure that you are deducting adequate taxes from your unemployment benefits, use the Estimated Tax Payments Calculator. To avoid an underpayment penalty, you should also make quarterly anticipated tax payments if low tax is withheld.
- Pay your estimated taxes every quarter. Making due payments to the U.S. Treasury throughout the year will help you avoid having a sizable tax burden. Another choice for paying your taxes as you go is to make estimated quarterly payments. You must make these payments yourself instead of having taxes automatically deducted.
You may make estimated quarterly payments and withhold your taxes if your total tax withholding does not sufficiently cover the income taxes you would owe, depending on the sum of your unemployment benefits and your other sources of income.
Calculate your potential quarterly expected tax payments with the estimated payments calculator. The most convenient payment methods for you are also listed in this link.
- Completely pay your taxes. You can pay your taxes in full when they are due if you require the whole amount of your unemployment benefits to cover your costs and cannot make anticipated quarterly payments.
You can be assessed an underpayment penalty if you fail to pay enough taxes throughout the year. However, the harm might not be considered depending on how much unemployment compensation you receive. Talk to a tax preparer or get in touch with a VITA location to get advice on what to do. Depending on your financial condition, you can choose to withhold at specific times and not at other times in states where you can adjust your withholding on a biweekly or regularly. For information about your choices for withholding, contact the state unemployment office.
For an estimate of your financial obligations, use TaxSlayer’s Tax Refund Calculator.
If you are unable to pay your taxes as you go, the IRS claims that it may waive the penalty:
It would be unfair to apply the penalty because you failed to make a required payment due to a tragic occurrence, disaster, or other extraordinary condition, or
You underpaid your projected tax payments owing to the justifiable cause rather than willful neglect because you retired (after turning 62) or became incapacitated during the tax year for which you were supposed to make the payments or the tax year before.
Paying Unemployment Taxes at the State and Local Level
Depending on where you reside, there may be many ways for you to pay your local and state taxes. Get in touch with your state, county, or local unemployment office to find out more about your alternatives for paying your taxes. These choices could consist of the following:
- Requesting the withholding of local and state taxes. The procedures for requesting municipal and state tax withholding vary.
- Making projected quarterly payments. State and municipal governments may have the different anticipated amount due dates than the federal government.
- Completely paying your taxes. You can pay your taxes in full when they are due if you require the whole amount of your unemployment benefits and cannot make anticipated quarterly payments. However, you can be assessed an underpayment penalty if you don’t pay enough taxes during the year.
What can I do if I can’t pay my federal taxes?
Make a plan and pay what you can if you owe taxes but need to pay them in full. Remember that you will be assessed interest and penalties if the balance is not paid in full when using a payment plan.
Learn more: What You Should Know About 2023 Tax Season