How Unemployment Benefits Will Affect Your 2020 Taxes
The Covid-19 pandemic has affected most people across the globe. This global pandemic caused many countries to shut down their economies for weeks and even months. The pandemic has affected us all in some way. Many people lost their jobs and as a result are collecting unemployment benefits. To help many people the federal government gave Americans an additional $600 per week beginning in April and ending July 2020. Some taxpayers were earning more money collecting unemployment than they were on their job. Therefore, many Americans may be surprised this tax year.
Individuals receiving unemployment benefits this year could face a tax surprise in 2021: owing the IRS or receiving smaller refunds. “A big concern for a lot of people is that unemployment is taxable, especially for people who get a huge amount and don’t have withholding from other sources,” said Ann E. Kummer, CPA and partner at Kirshon & Co. in Poughkeepsie, New York. “They could end up with a tax bill next year, and if we’re not in a better position economically, they’ll be hurting,” she said.
Unemployment benefits are subject to federal income taxes, as well as state income taxes depending on the state where you reside. That’s where withholding comes in. If you completed a Form W-4, then 10% of your payment is set aside for federal income taxes. You can also opt to pay estimated taxes quarterly. The first and second quarters’ payments were due on July 15. Sept. 15 was the deadline for the third quarter, and Jan. 15 is the due date for the fourth quarter. Failure to withhold enough tax could mean that unemployment recipients will owe the IRS or receive a smaller refund when they file. Unemployment benefits are subject to federal income taxes, as well as state income taxes depending on the state where you reside.
Some recipients of unemployment also receive social security and the extra $600 per week may have taken them over the threshold for the amount they can earn per year. Unemployment benefits do not affect or reduce retirement and disability benefits. State unemployment compensation payments are not wages because they are paid due to unemployment rather than employment.