Do I Owe Taxes on Unemployment? 

woman looking confused and shocked

Is unemployment taxable? Your tax questions answered 

Unemployment rates skyrocketed, resulting in millions of first-time filers. But unaware to many who collected benefits, unemployment checks are taxed. Millions of out-of-work Americans may be in for a surprise tax bill. Here’s a closer look to how unemployment and taxes work out.

Millions more Americans have filed for unemployment with each week the pandemic rages on in the U.S. More businesses have shut down or hit pause. More are out of work.

Thanks to federal lawmakers, out-of-work Americans have access to additional unemployment benefits. Lawmakers approved an additional $600 weekly benefit to unemployed Americans through the CARES Act in March. Those added benefits expired July 31. New legislation pays an extra $300 on top of state weekly benefits for 11 weeks.

It’s good news for out-of-work Americans. But many who received unemployment benefits may not realize that money is subject to taxes. Millions who filed for unemployment for the first time may be in for a shock come tax season.

Now, the bad news. Unlike traditional employment, you are not required to have taxes withheld from your unemployment checks. Typically, that’s not much of an issue, given unemployment benefits are no more than a few hundred dollars. With a boost from the federal government, these checks are a lot bigger. Those who sustained a significant drop in income due to a job loss could still end up with a big tax bill.

There is no automatic tax withholding with unemployment benefits. This means taxpayers must opt in to have taxes withheld from their unemployment benefits. Understandably, many unemployed people don’t choose to have taxes withheld. Should you elect to have taxes withheld, a 10% flat federal tax rate will be held from each paycheck. Withholding taxes from your unemployment benefits checks is a great start. But simply doing so doesn’t mean you’re out of the woods come tax season. 

  • Is my unemployment check taxed?
    Yes. Additional $600 weekly benefits are taxable, too. State unemployment benefits and anything extra from the federal government count as taxable income. 
  • Do I owe taxes on unemployment?
    Yes, more than likely. Unlike common wages, you don’t pay Social Security or Medicare taxes on unemployment benefits. But the federal government and possibly your state will tax on your unemployment benefits.
  • How much in taxes will I owe on unemployment?
    Everyone is different. You may receive a refund or owe taxes. It depends on what tax credits and tax deductions you may qualify for. If you don’t pay tax throughout the year, you could wind up paying penalties and interest.

I collected unemployment. Do I owe taxes?

Quick answer: Yes. Unemployment is taxed.

Traditional employment is obligated to withhold a portion of your paycheck to cover taxes. Unemployment does not require you to withhold anything. It’s your choice if you want taxes withheld from your unemployment checks. Many unemployed do not opt to have taxes withheld. 

Withholding taxes functions like a pay-as-you-go set up. It helps keep you from a surprise bill come tax season. According to a survey from Jackson Hewitt, 39% of respondents who collected unemployment did not withhold or set aside money for taxes. Fifty-six percent of taxpayer respondents under the age of 30 did not know unemployment benefits are taxable.

But anyone who collected unemployment benefits must pay federal income tax on those benefits. Some states require recipients to pay state income tax on unemployment benefits. Others say unemployment benefits are income tax exempt. Taxpayers are also responsible for federal income tax should they have worked part of the year prior to losing their job.

I’m collecting unemployment now. How can I withhold taxes?

Most states do not withhold taxes from unemployment benefits voluntarily. If you are a recipient of unemployment benefits, it may not be too late to start withholding taxes. You can request a form W-4V through the state’s unemployment office. This form will allow you to opt in for withholding or stop it completely. You can make changes to tax withholdings on a biweekly basis.

But there’s a catch: tax withholdings on unemployment benefits are only available at a 10% rate. It’s worth pointing out that a 10% withholding is often not enough. If you received the extra $600 a week, that alone adds up to $9,600 in taxable income for a 16-week period.  It’s probable that 10% won’t be enough to cover that. Even if you did elect withholdings, you should still set aside a portion of your benefits for possible taxes due come Tax Day.

Also, withholdings are not retroactive. Should you opt in for tax withholding, that will only affect future benefits payments. It will not make up for past unemployment benefits.

You may opt to do-it-yourself. It requires more planning and discipline. To do this you may calculate what you might owe and set it in a savings account. How much should you earmark for taxes? Generally speaking, 10% is a good starting point for how much to set aside. But some suggest 20-25% is a better alternative. 

If you don’t withhold upfront, you may need to send quarterly estimated tax payments to the IRS to avoid an expensive tax bill, as well as any penalties. This is similar to what a freelance or gig economy worker might do.

Do I need to make quarterly payments to the IRS to avoid penalties?

Not necessarily. 

You are under no obligation to pay quarterly payments to the IRS. But it may be a smart idea. You can wait until you file your taxes and pay any tax you owe at that time. But you may want to think before choosing that option. You could face a penalty for underpaying your taxes. 

Had you not had any withholdings, your April tax bill may be quite bigger than you might expect. Your tax bill may be more than you can afford. You may face a penalty and pay interest if you don’t pay your tax bill in full. 

Quarterly payments help reduce the likelihood you’ll face a penalty. You will need to estimate your total owed to make quarterly payments direct to the IRS. This method requires that you run calculations and meet deadlines every three months. The IRS has a withholding estimator that can give you a clearer picture of what you should pay.

What if I can’t pay my taxes on time?

If you do owe the IRS money and cannot afford to pay your taxes on time, the IRS offers payment plan options designed to help you. But be aware that not paying the full amount owed by the April 15 filing deadline will mean you will pay interest and possibly a penalty, as well. 

There’s still plenty of time before the April 15 tax filing day. Planning ahead can help make managing taxes easier. If you are in need of financial assistance brought on by any unexpected or surprise bills, we may be able to help. Visit us online to learn more. 

Net Pay Advance is a licensed loan provider, locally owned and operated in Wichita, Kansas. Our No. 1 priority is helping you, the customer, by providing access to the cash you need and helping support financial independence goals with valuable, informational, and entertaining content. Stay up-to-date on our posts by following the Net Pay Advance Facebook, Instagram, and Twitter pages. Our organization is committed to transparency; learn more about our authors and editorial policy. The information provided within this blog is for educational purposes only and should not be construed as financial or legal advice. Please contact us if you have any questions.

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