What You Need to Know about Taxes on Your Unemployment Benefits

Author : Camputaro & Associates
Oct 01, 2020


The number of Americans filing for unemployment has skyrocketed since the onset of COVID-19. Many of these individuals have never received unemployment benefits before, and may be unaware of how taxes on this income are handled. If you’re receiving unemployment income for the first time, this blog will give you an overview of how your benefits are taxed, and how you’ll need to pay those taxes.

What Benefits Are Taxed?

First, let’s talk about which types of unemployment income are taxable, as there are several different kinds. It’s important to be aware of the exact type of unemployment you’re receiving, which agency you’re receiving the benefit from, and whether or not that benefit is taxed.

There is some particular confusion on this matter when it comes to the special unemployment compensation put into place through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Because the stimulus checks that were a part of this package were not taxed, many people are under the impression that the act’s unemployment compensation is not taxable either. However, this is not true. Along with unemployment through the CARES Act, there are several other types of unemployment that are also taxable:

-State or federal unemployment compensation

-Disability benefits paid as a substitute for unemployment

-Railroad unemployment compensation

-Unemployment under the Disaster Relief and Emergency Assistance Act of 1974

-Unemployment through the Airline Deregulation Act of 1978

-Trade readjustment allowances that fall under the Trade Act of 1974

Knowing what type of unemployment you’re receiving will also let you know which agency is paying out those benefits, which is essential information when paying taxes.

How Are Unemployment Benefits Taxed?

Unlike W-2 income, unemployment benefits have no taxes withheld upfront. So, unless you opt for withholdings (we’ll get to that momentarily), you’ll end up needing to pay all of the taxes on that income when you file your return. Not only does this leave you with a large lump sum that can be difficult to pay, but you may also have additional fees tacked onto your bill; the U.S. tax system is a pay-as-you-earn structure, which means that you can be fined for overdue taxes in cases like these.

In order to avoid this situation, there are two options available for you to pay taxes on your unemployment income:

1. Opt for withholdingsJust as you can adjust the automatic withholdings on your paychecks, you can also opt for withholdings from your unemployment checks. To do so, simply fill out Form W-4V to elect for a flat 10% withholding from your unemployment benefits. This is where knowing which agency paying you comes in handy, as the form will need to be submitted to the agency that’s sending you the checks—not to the IRS. Also, certain agencies will have their own withholding forms; if this is the case, make sure to use theirs instead of the W-4V.

2. Make quarterly paymentsYour second option is to make quarterly estimated tax payments, much as self-employed individuals and business owners do. With this method, you would submit a tax payment each quarter by estimating what your total income for the year will be and sending in 25% of that amount. But calculating those numbers can be difficult, so we strongly recommend that you work with an accountant if you want to use this method to ensure you’re paying the right amount each quarter.

Using either of these methods should cover most, if not all, of the taxes you’ll owe on your unemployment benefits.

Filing Your Taxes

When tax season rolls around, you should receive Form 1099-G from the agency that is paying out your unemployment benefits. Box 1 of this form will show how much unemployment income you received, and box 4 will show how much tax was withheld from that income (if you opted for withholdings). If you did not opt for any withholdings, the amount in box 4 should be $0. This information should be reported on your 2020 tax return, along with any other income you received this year.

If you have questions or concerns about paying taxes on your unemployment income, or filing taxes with this income in a few months, contact one of our tax experts. We’ll go over all of your income with you, help you make necessary tax payments on untaxed benefits, and ensure you’re ready to go when tax season rolls around. Give us a call today to schedule an appointment with one of our experienced CPAs.

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Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174
(386) 255-2511