Unemployment compensation can provide valuable relief when taxpayers are experiencing temporary job loss, but there’s often an unpleasant surprise that follows these payments: This income is taxable at the federal level. If you don’t have taxes withheld from the payments, you may owe a big tax bill when you file your return.
If you received unemployment payments during the year you should receive Form 1099G, Certain Government Payments. The amount of unemployment compensation you received from all sources, including federal, state and local government assistance programs, will be shown in Box 1 of this form; the amount of federal tax that was withheld from your unemployment payments appears in Box 4.
The American Rescue Plan
In order to mitigate economic harm caused by the Covid-19 pandemic, in early 2021, Congress passed a State and Local Aid package of relief called The American Rescue Plan. This was in addition to three relief packages implemented in 2020: the year-end spending and aid package, The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act (FFCRA).
Among the benefits outlined in the plan that includes unemployment are an exemption of the first $10,200 in 2020 unemployment benefits from federal income tax for households with incomes below $150,000 per year.
You may not have had any tax withheld at all from your unemployment payments, in which case you must pay tax due on the income you received by the filing deadline in April (extended to May, 2021.) If you are not paying taxes on unemployment income through withholding then you should make quarterly estimated tax payments to remain in compliance with the federal “pay-as-you-go” tax policy, thereby avoiding potential penalties for late payment.
You can choose to have tax withheld from your unemployment compensation by completing Form W-4V, Voluntary Withholding Request and submitting it to the federal, state or local agency that issues your payments. This can help you avoid accruing outstanding tax balance.
Staying aware of how much, if any, tax is being withheld from your unemployment compensation can help you prepare for any tax liability that may be accruing and avoid unpleasant surprises when you are ready to file. The IRS advises taxpayers who receive any type of unemployment compensation to check and adjust their withholding as appropriate. You can utilize the Tax Withholding Estimator to help you figure out whether you’re withholding enough.
What about state taxes?
Unemployment compensation may or may not be considered taxable income by your state. Many states do fully tax this income while some partially tax it and others leave it totally untaxed at the state level. Check with your state’s tax authority to ascertain your state tax obligations related to unemployment compensation.