Unemployment numbers surged in 2020, topping out at 14.7% in April, as the carved a path through the US economy, leaving millions of Americans out of work. As the federal government and individual states grappled with a hodgepodge of responses, including a series of stimulus payments and the Paycheck Protection Program, it was unemployment insurance that provided a lifeline to many folks struggling to get by.
And though stimulus checks, born from in March and , which , unemployment payments are taxed and will need to be accounted for in your 2020 return. We cover all of the details about unemployment benefits and taxation below — and we have .may have been a boon to many in 2020, they may provide a surprise this year around tax time. Unlike the
Do you have to pay taxes on unemployment?
Short answer: Yes. The IRS considers unemployment benefits “taxable income.” When filing for tax year 2020, your unemployment checks will be counted as income, taxed at your regular rate. This applies both to standard unemployment benefits and the expanded benefits that were available to some during 2020. Given that you’re not required to have federal taxes withheld from your benefit payments, many people opt not to, electing to kick the tax impact down the road.
Do you have to pay state taxes on unemployment?
Maybe. If your waive unemployment income taxes. They are:, you may have to pay taxes on your benefits to both state and federal governments. That noted, there are a few states that
- New Jersey
Did I already pay taxes on my unemployment?
If you received unemployment insurance this year, you’ll receive a Form 1099-G, which shows how much money you received from unemployment benefits. It will also show whether or not — and how much — you elected to withhold.
How to avoid a large tax bill
Whether or not to withhold depends on your financial situation. If you’re barely getting by, it can be appealing to put off paying taxes in the hopes of being in a stronger financial situation later on. That noted, it can be devastating to get hit with a big tax bill in the spring. Your options include, making estimated quarterly tax payments or having your taxes automatically withheld.
Many sole proprietors and freelancers make estimated quarterly tax payments, which lets you spread out what you owe into four annual payments. That noted, because these payments are based on your estimated total income, you could end up paying too much, resulting in a refund, or too little, which would require an extra payment come the April 15 deadline.
You can elect to have your unemployment checks taxed like a regular paycheck by filling out Form W-4V. The government will withhold the taxes due on each check, which both reduces your cash in hand — but also lessens the impact of a major tax bill coming all at once.