How Does Unemployment Affect My Taxes?

Due to the massive number of job losses caused by the coronavirus pandemic, many Americans are now receiving unemployment benefits for the first time in their lives. Going through a job loss can be incredibly stressful, and taxes aren’t likely to be top of mind as you overcome financial hardship.

However, you are required to pay income tax on unemployment income.

As you handle this stressful financial time, know that there are free tools to help you take control of your overall financial situation.

For now, here’s how to navigate paying taxes on your unemployment compensation.

Unemployment due to Coronavirus

Unemployment compensation must be reported as taxable income during the year in which it is received for federal, and in some cases also state, income tax purposes. This includes special unemployment compensation that was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed last year, such as the $600 per week extra unemployment payments that expired at the end of July.

So if you received unemployment benefits at any time in 2020, you must report them on your 2020 federal income tax return. Note, however, that Social Security and Medicare taxes are not assessed on unemployment benefits — only income tax is assessed on the payouts.

Most states also tax unemployment benefits. The exceptions are California, Montana, New Jersey, Oregon, Pennsylvania, and Virginia. Meanwhile, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t collect any state income tax.

Are you ready to file your 2020 taxes?

Should You Have Taxes Withheld?

To avoid having a big bill on Tax Day, you can choose to have 10% of your unemployment benefits withheld to cover all or part of your tax liability. Simply complete IRS Form W-4V, Voluntary Withholding Request, and send it to the agency that’s paying your benefits. If you prefer, you can make quarterly estimated tax payments instead. 

1 2
View single page >> |

Learn everything you need to know in our Guide to Filing Your Taxes in 2021

Disclosure: Free ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.