Do you pay? Short answer: Yes.
Since tax seasons were different during the pandemic, each situation can be different.
The American Rescue Plan gave a federal tax break on unemployment benefits earned in 2020, and you didn’t have to pay taxes on the first $10,200 of your benefits. Unfortunately, there is no tax break for unemployment benefits you got in 2021.
While you’re not required to pay federal tax on stimulus checks (another part of the government relief package) the Internal Revenue Service (IRS) counts unemployment benefits as part of your income, just like wages. That means unemployment must be reported on your federal tax return.
(Note: Unemployment benefits may or may not be taxed on your state tax return, depending on where you live. Check your state’s laws.)
What Counts as an Unemployment Benefit?
Unemployment benefits can include unemployment insurance benefits paid to you by your state and railroad unemployment compensation benefits. It also includes any payments made to you by the Federal Unemployment Trust Fund and Federal Pandemic Unemployment Compensation.
Paying Unemployment Taxes at the Federal Level
Although unemployment insurance compensation is counted as income, federal income and Social Security taxes aren’t automatically withheld like they are from your wages. This means that you are responsible for paying the taxes owed from any unemployment benefits you receive. Form 1099-G is used to file unemployment benefit taxes.
If you received Form 1099-G but didn’t file for unemployment benefits, it may be a sign of identity theft and fraud. Contact your state unemployment office immediately for additional information and on how to report the potential fraud.
The state will send a corrected Form 1099-G to the IRS to let them know that you did not receive benefits. However, don’t report it on your federal tax return, or the IRS will assume that you have received unemployment benefits and you may have to pay taxes on it.
Three options are available to pay your federal income taxes on your unemployment benefits, which can help you avoid having a large bill at tax time.
- Request your state employment agency to withhold your federal taxes.
With this option, a flat 10% of each of your unemployment checks will be used to pay federal taxes, similar to withholding taxes on a regular paycheck. You can choose to have your taxes withheld when you first register for unemployment benefits. You can also give Form W-4V, Voluntary Withholding Request to the agency issuing your unemployment benefits to start withholding your taxes. You can 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. In some states, you can change your withholding biweekly (online or by mail) when asked to certify your benefits. In addition, 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.
- Make quarterly estimated tax payments.
You can prevent a large tax bill by making quarterly estimated payments to the U.S. Treasury throughout the year. However, unlike having taxes automatically withheld, you’ll need to make these payments actively. Depending on your unemployment benefits amount and 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.
- Pay your taxes in full.
If you need to use the full amount of your unemployment benefits to cover your expenses and cannot make quarterly estimated payments, you can pay your taxes all at once when they are due. There’s a chance that this option will involve an underpayment penalty for not paying enough taxes throughout the year. The penalty may not necessarily be significant, depending on how much unemployment benefits you receive. Discuss with your tax preparer or contact a VITA site for help.
If You’re Unable To Pay Your Taxes
If you’re 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 Level
In New Jersey and Pennsylvania, unemployment benefits are exempt from income taxes, so you don’t need to include them on your state returns.
CWF Can Help with All Your Tax Needs!
With so many tax code changes, it’s easy to get confused. Campaign for Working Families (CWF) can help! If you’re a working family or an individual in Philadelphia, Montgomery County, and Southern New Jersey earning less than $65,000 per year, you can get free professional help at CWF. An IRS-certified CWF tax preparer will help you eliminate the stress that comes with taxes and make sure you get the tax refund you deserve!