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“Last year, amid the pandemic, I collected unemployment benefits for the first time in my life. What do I need to know about taxes and unemployment?”
It may seem unfair to those who have already suffered financial consequences of COVID-19, but you have to pay taxes on your unemployment benefits. According to the IRS, “unemployment compensation is taxable and must be reported on a 2020 federal income tax return.”
That includes all state unemployment benefits, as well as all emergency federal benefits awarded under the CARES Act: the extra $600 under the Pandemic Unemployment Compensation (PUC) program and the two programs for self-employed and gig workers, Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC).
One bright spot is that unlike your normal wages, unemployment is not subject to FICA taxes, which includes the money that workers and their bosses set aside for Social Security and Medicare.
You may have been too freaked out at the time you filed your claim, but at that time, you could have chosen to have a flat 10 percent withheld from your benefits to cover part or all of their tax liability. Of course, there were many who needed every available dollar in real time, and therefore did not elect withholding, nor did they make quarterly estimated tax payments. Without withholding or quarterly estimates you may need to pony up some moolah to Uncle Sam in April.
The federal tax rate applied to your benefits depends on your total income – here’s a quick reminder of the tax rates and income ranges to which they apply for calendar year 2020:
|Married Couples Filing Jointly||Single Filers|
|Taxable Income ($)||Marginal Rate (%)||Taxable Income ($)||Marginal Rate (%)|
|Not over $19,750||10%||Not over $9,875||10%|
|$19,751 to $80,250||12%||$9,876 to $40,125||12%|
|$80,251 to $171,050||22%||$40,126 to $85,525||22%|
|$171,051 to $326,600||24%||$85,526 to $163,300||24%|
|32%||$163,301 to $207,350||32%|
|$414,701 to $622,050||35%||$207,351 to $518,400||35%|
|Over $622,051||37%||Over $518,401||37%|
In the above description, I talked about federal taxes.
Then there’s the state tax bill that might be due. I say might, because there are some states that do not levy state income taxes on wages. They include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. There are six more states that waive taxation on unemployment benefits specifically: Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia.
If you don’t live in one of the 15 states listed above, you will also be on the hook for state taxes on your unemployment benefits.
Because your unemployment benefits are taxable, make sure that you have received Form 1099-G – it was supposed to arrive by the end of January via mail, though some states allow you to download the document on the state’s unemployment website. The form will show the amount of unemployment compensation you received during 2020 in Box 1, and any federal income tax withheld in Box 4. You will need this information, along with all of your other tax documents, to prepare your 2020 federal return.
One last warning from the IRS regarding your 1099-G: the agency warns that there’s a big unemployment benefit identity theft scam that is dangerous. Thieves are filing fraudulent claims for unemployment compensation using stolen personal information of individuals who never filed unemployment claims. The fraudsters then collect the unemployment payments made as a result of the sham claims.
The only way you would know about the scam is when you receive the associated tax form. If you or someone you know has received an incorrect Form 1099-G for unemployment benefits you did not receive, immediately contact the issuing state agency to request a revised Form 1099-G showing you did not receive these benefits.
To protect your information in the future, you may want to take an easy, extra precaution by obtaining an Identity Protection PIN (IP PIN) to protect you against tax related identity theft if you wish to further protect your tax account. The IP PIN authenticates you as the valid filer of the return.