Millions of jobless Americans who collected unemployment benefits as a result of the COVID-19 pandemic could face an unpleasant surprise when they file their taxes this year.
That’s because unemployment benefits, including extra money distributed through federal aid programs, count as taxable income.
Unemployment benefits vary by state, but the $1.9 billion American rescue plan that Democrats signed into law last March sweetened the aid, giving recipients an extra $300 a week through early September. The average laid-off worker was receiving about $630 a week in benefits before the enhanced relief expired on Sept. 6, 2021.
Congress also passed a $900 billion coronavirus relief package in late December 2020 that extended unemployment aid by $300 a week through mid-March.
In addition to providing workers with an extra $300 a week on top of their regular state benefits, the programs offered help to workers who were not normally eligible and extended state unemployment benefits once they ran out.
But many Americans who received the benefits may not have been aware that the money was taxable, or that taxes on the aid are not automatically withheld, setting them up for a refund when they file their taxes.
Even more confusing for unemployment aid recipients is that last year, Congress exempted federal income taxes on up to $10,200 in 2020 unemployment insurance benefits for people earning less than $150,000 a year. The exemption will not apply to this year’s tax filing season, which began on January 24 and ends on April 18.
Benefits are taxable at the federal level and in most states (California, New Jersey, Oregon, Pennsylvania, and Virginia are the only ones that exempt them entirely), meaning recipients could end up with a tax bill this year, even if they lost their job. You do not have to pay Social Security and Medicare taxes on your unemployment benefits.
The total amount of income you receive and your filing status will determine if you need to file a tax return.
There are roughly 25 million Americans who received jobless aid last year, according to data from the left-leaning Century Foundation.
To avoid an unexpected tax shock next year, beneficiaries had two options:
Have taxes withheld:
When you first receive benefits, your state government will provide you with a IRS Form 1099-G. You can elect to have income taxes withheld from your compensation at this time (total federal tax withheld will appear in Box 4 and state tax withheld will appear in Box 110).
If you are already receiving payments and want the government to automatically take your tax liability from the money before you receive it, like it does with a typical paycheck, then you must file Form W-4V. This tells the payer (the state government) to withhold 10% of your check for federal income tax.
Make quarterly payments to the IRS:
If you prefer not to have your taxes withheld by the government, you can choose to make the estimated payment each quarter.
To do this, the beneficiaries must calculate their obligation and meet payment deadlines every three months. Missing the amount you owe or missing a deadline could result in a penalty charge.