By Christine Tran, 2021 Get It Back Campaign Intern
You can access the following unemployment taxes guidance as a Google doc here.
Yes, you need to pay taxes on unemployment benefits. However, thanks to a new rule passed by Congress, you don’t have to pay tax on the first $10,200 of the unemployment benefits you received in 2020 if your income is under $150,000.
Like wages, unemployment benefits are counted as part of your income and must be reported on your federal tax return. Unemployment benefits may or may not be taxed on your state tax return depending on where you live. Regardless, you must pay federal taxes on your unemployment benefits.
If you received unemployment benefits, your tax refund may be smaller than in previous years. If you didn’t pay taxes on your unemployment checks as you received them, your tax refund may be used to pay for the taxes that you owe, resulting in a smaller refund.
Luckily, you may be able to offset some of those taxes. Along with the new unemployment federal tax break, Congress also passed a new ‘lookback rule’ which means if you earned less in 2020, you can use either your 2019 or 2020 income on your taxes—whichever one gets you the largest Earned Income Tax Credit or refund from the Child Tax Credit.
COVID-19 economic relief and taxes
Stimulus Checks and Expanded Unemployment Benefits
The COVID-19 pandemic has led to severe economic hardship, with millions of Americans losing their jobs. As a response, Congress passed three key legislation that expanded unemployment benefits and delivered direct stimulus payments to provide economic relief. As more and more people — about 20 million people since November 2020 (many for the first time) — are claiming unemployment benefits, these are the key things to know:
- The additional $600 per week from the CARES Act is taxable. The $600 emergency federal unemployment benefits you may have received each week on top of your regular unemployment benefits is part of your taxable income for federal taxes and possibly for state taxes.
- The additional $300 per week from the $900 billion relief package is taxable. The $300 emergency federal unemployment benefits you received each week on top of your regular unemployment benefits is part of your taxable income for federal taxes on and possibly for state taxes.
- The additional $300 per week from the American Rescue Plan is taxable. The $300 emergency federal unemployment benefits you received each week on top of your regular unemployment benefits is part of your taxable income for federal taxes on and possibly for state taxes.
- The first stimulus check from the CARES Act is not The $1,200 stimulus payment is considered an advance of a tax credit for the 2020 tax year and is not considered part of your taxable income. Note: If you didn’t receive your stimulus payment in 2020, click here to learn how to claim it on your tax return if you qualify.
- The second stimulus check from the $900 billion relief package is not The $600 stimulus payment is also considered an advance of a tax credit for the 2020 tax year and is not considered part of your taxable income. Note: If you didn’t receive your stimulus payment, click here to learn how to claim it on your tax return if you qualify.
- The third stimulus check from the American Rescue Plan is not The $1,400 stimulus payment is also considered an advance of a tax credit for the 2021 tax year and is not considered part of your taxable income. Note: If you didn’t receive your stimulus payment, click here to learn how to claim it on your tax return if you qualify.
Unemployment Federal Tax Break
The latest COVID-19 relief bill (American Rescue Plan), gives a federal tax break on unemployment benefits. This means that you don’t have to pay federal tax on the first $10,200 ($10,200 per person if you are married, filing jointly) of your unemployment benefits if your adjusted gross income (AGI) is less than $150,000 in 2020. The $150,000 income limit is the same whether you are filing single or married.
For paper filers, the IRS published instructions on how to claim the unemployment tax break: New Exclusion of up to $10,200 of Unemployment Compensation. For online filers, the IRS has stated that tax software companies have updated their systems to reflect the unemployment federal tax break. If you file your taxes online and haven’t filed for 2020 yet, you may want to make sure your tax software is updated before filing your tax return.
If you filed your 2020 tax return before this new law change, the IRS is asking you not to file an amended return and not to take any additional steps. The IRS will automatically issue refunds starting in May and into the summer to those who qualify. If you claimed tax credits such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), the IRS will also automatically issue refunds if you qualify for a higher amount because the tax break changed your income level.
You should file an amended return if you didn’t claim certain tax credits (such as the EITC and CTC) because your unemployment benefits put you above the maximum income limit, but now, because of the new unemployment tax break, you newly qualify. You can use the EITC Eligibility Checker to see if you now qualify because of the tax break.
In addition, remember that this is a federal tax break, which means that you may still have to pay state taxes on your unemployment benefits. Some states are deciding whether to follow the federal tax break, so you may want to wait to file your state tax return until a decision is made. You can read Kiplinger’s State-by-State Guide on Unemployment Benefits to see if your state will give a state tax break on your unemployment benefits.
If your state decides to give you a state tax break and you already filed your state return, you should check to see if you are newly eligible for any state tax credits.
How do Unemployment Taxes work?
Unemployment Taxes at the Federal Level
At the federal level, unemployment benefits are counted as part of your income, along with your wages, salaries, bonuses, etc. and taxed according to your federal income tax bracket.
With most income, like wages, taxes are pay-as-you-go. With wages, you are expected to pay taxes on your income as you earn it. As an employee, part of your paycheck is usually automatically deducted to pay your federal income and Social Security taxes. Unlike wages, federal income taxes are not automatically withheld on unemployment benefits.
Unemployment Taxes at the State Level
If you live in a state that has a state income tax, you may need to pay state income taxes on your unemployment benefits in addition to federal income taxes.
For states that don’t have a state income tax or don’t consider unemployment benefits taxable income, you won’t need to pay state income taxes on your unemployment benefits. These are 17 states that don’t tax unemployment benefits:
|States that don’t have any income taxes||Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming|
|States that only have income taxes for investment income||New Hampshire and Tennessee|
|States that exempt unemployment benefits from income taxes||Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia|
|States that may only tax a portion of your unemployment benefits||Indiana and Wisconsin|
If you don’t live in one of these 17 states, your unemployment benefits may be taxed by your state. Your state’s individual income tax rate can be found here. To learn more about your state individual income tax, visit your state’s Department of Revenue website or read Kiplinger’s State-by-State Guide on Unemployment Benefits.
Unemployment Taxes at the Local Level
Depending on where you live, your city or county may also tax your unemployment benefits at the local income tax rate. Contact your state, county, or local unemployment office to learn more about unemployment benefits and local taxes.
How do I pay my unemployment taxes?
Paying Unemployment Taxes at the Federal Level
There are 3 options to pay your federal income taxes on your unemployment benefits. If you don’t expect your benefits to add much to any tax you owe, it may be easiest to pay the full amount at tax time. The following options can help you avoid having a large bill at tax time.
1. Request your state employment agency to withhold your federal taxes. Withholding your taxes means that a flat 10 percent of each of your unemployment checks will be used to pay federal taxes, similar to withholding taxes on a regular paycheck.
Usually, you can choose to have your taxes withheld when you first register for unemployment benefits. You can also complete and give Form W-4V, Voluntary Withholding Request to the agency that is disbursing your unemployment benefits to start withholding your taxes. Request Form W-4V, Voluntary Withholding Request from your unemployment office or find it on the IRS website. If your agency has its own withholding form, use that one instead.
Depending on your state, you can change your withholding on a biweekly basis (online or by mail) when you are asked to certify for your benefits. In states where you can change your withholding on a biweekly or regular basis, you can choose to withhold at certain times and not to withhold at other times, depending on your financial situation. Check with your state unemployment office on your withholding options. Note: some states have been unable to provide federal withholding on emergency unemployment benefits enacted by Congress, although they may do so for regular state benefits.
Use the Estimated Tax Payments Calculator to make sure that you are withholding enough taxes from your unemployment benefits. If too little tax is withheld, you may also have to make quarterly estimated tax payments to avoid an underpayment penalty.
2. Make quarterly estimated tax payments. You can prevent a large tax bill by making estimated payments to the U.S. Treasury throughout the year. Estimated quarterly payments are another option to pay your taxes as you go. Unlike having taxes withheld, you’ll need to actively make these payments.
Depending on the amount of your unemployment benefits and your other sources of income, you may choose to make quarterly estimated payments and withhold your taxes if your total tax withholding does not cover enough of the income taxes you will owe.
Use the Estimated Payments Calculator to figure out how much you may want to pay for quarterly estimated tax payments. This link also provides information on ways to make these payments that are most convenient for you.
Estimated payments are due four times a year on the following dates:
|Income from:||Quarterly Estimated Taxes Due:|
|January 1 to March 31||April 15 (Tax Day)|
|April 1 to May 31||June 15|
|June 1 to August 31||September 15|
|September 1 to December 31||January 15 of the following year|
3. Pay your taxes in full. If you need your full amount of your unemployment benefits for your expenses and cannot make quarterly estimated payments, you can pay your taxes all at once when they are due.
You may be charged an underpayment penalty for not paying enough taxes throughout the year. The penalty may not be significant, depending on how much unemployment benefits you receive. You can discuss with a tax preparer or contact a VITA site to help advise you on what to do. In states where you can change your withholding on a biweekly or regular basis, you can choose to withhold at certain times and not to withhold at other times, depending on your financial situation. Check with your state unemployment office on your withholding options.
Use TaxSlayer’s Tax Refund Calculator to get an idea of what you’ll owe.
According to the IRS, if you are unable to pay your taxes as you go, the IRS can waive the penalty if:
- You didn’t make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.
To request a waiver on your underpayment penalty, file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
Paying Unemployment Taxes at the State and Local Level
At the local and state level, the options to pay for your state and local taxes may differ depending on where you live. Contact your state, county, or local unemployment office to learn about the different options to pay your taxes. These options may include:
1. Requesting to have state and/or local taxes withheld. The steps to request state and local tax withholding differ.
2. Making quarterly estimated payments. The due dates for estimated payments at the state and local level may differ from federal due dates.
3. Paying your taxes in full. If you need your full amount of your unemployment benefits and cannot make quarterly estimated payments, you can pay your taxes all at once when they are due. However, you may receive an underpayment penalty for not paying enough taxes throughout the year.
What can I do if I can’t pay my federal taxes?
If you owe taxes and can’t pay them in full, it is important to pay what you can and make a plan. Consider using a payment plan, but note that unless you pay the amount owed in full, you will be charged interest and penalties.
To learn more about your different payment options based on your financial situation, read What to Do if I Owe Taxes but Can’t Pay Them.
How do I Report my Unemployment Benefits?
Reporting Unemployment Benefits at the Federal Level
- In Box 1, you will see the total amount of unemployment benefits you received.
- In Box 4, you will see the amount of federal income tax that was withheld.
- In Box 11, you will see the amount of state income tax that was withheld.
You will report Box 1 of your Form 1099-G on line 7 of your Schedule 1, (Form 1040 or 1040-SR), Additional Income and Adjustments to Income and attach this to your Form 1040 or Form 1040-SR.
In certain states, you will not automatically be mailed a Form 1099-G. You will have to access your Form 1099-G online through your unemployment portal or call your state unemployment office to request that they mail your Form 1099-G. In other states, you will only be mailed a Form 1099-G if you selected that as your delivery preference.
|States that will not mail 1099-Gs at all||Connecticut, Indiana, Missouri, New Jersey, New York, and Wisconsin|
|States that will mail or electronically deliver 1099-Gs depending on which option you opted-into||Florida, Illinois, Michigan, North Carolina, Rhode Island, Tennessee, and Utah|
If you received Form 1099-G, but didn’t file for unemployment benefits, this may be a case of identity theft and fraud. Contact your state unemployment office immediately for additional information and how to report the potential fraud.
The state will send a corrected Form 1099-G to the IRS to state that you did you not receive benefits. Don’t report it on your federal tax return, or the IRS will assume that you have received unemployment benefits.
Reporting Unemployment Benefits at the State and Local Level
If your state, county, or city collects income tax on your unemployment benefits, keep your Form 1099-G for reference. You may have to attach it to your state, county, or local income tax return. If so, keep a copy for yourself.
Check with your state’s Department of Revenue and relevant county and local government tax agency for instructions on how to report your unemployment benefits at the state and local level.
Need Help with your Taxes?
- Code for America’s Get Your Refund website: Visit Get Your Refund to connect with an IRS-certified volunteer who will help you file your taxes. First, you will upload your tax documents online. Then, an IRS-certified volunteer will call you to discuss, prepare, and review your tax return for filing.
- Volunteer Income Tax Assistance (VITA) and Tax-Aide sites: VITA and Tax-Aide sites are IRS-sponsored programs that provide free tax preparation for those who earn less than about $56,000.
The deadline to file your taxes this year is May 17, 2021.
Problems with the IRS?
- Low-Income Taxpayer Clinics (LITCs): LITCs are programs at law schools, accounting schools, or legal services offices that provide assistance and legal representation to lower-income taxpayers who are in disputes with the IRS.
- Taxpayer Advocate Service (TAS): TAS is an independent organization within the IRS that can help people navigate through their tax problems and find solutions. Contact your local office.
- Community Legal Aid: Local legal aid services can provide free or low-cost legal help for people with tax problems.
All information on this site is provided for educational purposes only and does not constitute legal or tax advice. The Center on Budget & Policy Priorities is not liable for how you use this information. Please seek a tax professional for personal tax advice.