02 Sep Paying Taxes on Your Unemployment Benefits
The impact of the COVID-19 pandemic has left millions of Americans on unemployment benefits—many of them for the first time. As businesses close or as they reduce their staff size, former employees are turning to unemployment income to make ends meet. But what many first-time beneficiaries don’t know is that unemployment income is, in fact, taxable, despite the fact that taxes are not automatically withheld. Here’s what you need to know about paying taxes on your unemployment benefits.
Opting for Withholdings
Much like with your standard paychecks, withholdings on your unemployment checks can be adjusted. To do this, you can fill out Form W-4V, which can be found here, and elect to withhold a flat 10% from your unemployment benefits. This can cover part, if not all, of your tax liability for that income. Be sure to submit Form W-4V to the agency that is paying your benefits. Do not send it to the IRS. Please note that some agencies may have their own withholding forms, so be sure to ask about this, and use their form if they have one.
Making Quarterly Payments
If you choose not to have withholdings taken from your checks, you can make quarterly estimated tax payments instead. This is a method many businesses and self-employed individuals use to avoid falling behind on their income tax throughout the year, but it can be used for untaxed unemployment benefits as well. Making quarterly payments can be complicated, so be sure to consult with one of our Provo tax experts to ensure you’re paying the right amount, in the right way. The due dates for estimated tax payments for the third and fourth quarters are September 15, 2020, and January 15, 2021, respectively; make sure to start working on this now so you can get your payments in on time!
Which Benefits Are Taxable?
Many people on unemployment for the first time are uncertain whether or not their particular benefit type is taxable. Much of this confusion stems from the relief checks that went out earlier this year, which you will not have to pay taxes on. However, if you’re receiving any special unemployment compensation through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), this compensation will be taxed. If you do not opt for withholdings or make quarterly payments, you may find yourself owing a large amount in taxes when you file your return next year.
In addition to unemployment through the CARES Act, here are a few other types of unemployment payments that are taxable:
- Unemployment compensation paid by your state or the Federal Unemployment Trust Fund
- Railroad unemployment compensation
- Disability benefits that are paid as a substitute for unemployment
- Trade readjustment allowances covered under the Trade Act of 1974
- Unemployment through the Disaster Relief and Emergency Assistance Act of 1974
- Unemployment under the Airline Deregulation Act of 1978
If you return to work before the end of the year, we recommend using the IRS Tax Withholding Estimator to ensure that you also have enough withheld from your regular paychecks.
Filing Taxes with Unemployment Benefits
When it comes time to file your tax return, all unemployment beneficiaries should receive Form 1099-G from whichever agency is paying their benefits. This form will show how much unemployment income you received (Box 1) and how much tax you had withheld (Box 4). If you didn’t opt for withholdings, the amount in Box 4 should be $0. You’ll report this information on your 2020 tax return, along with any W-2 income you received this year.
If you have any questions about paying taxes on your unemployment benefits—be it through withholdings or quarterly estimated tax payments—contact one of the Provo tax experts at The Accounting Guys. We’ll help you to better understand how your benefits are taxed, so you don’t have any surprises when it’s time to file. Give us a call to schedule your appointment today!