How Unemployment Affects Your Taxes

unemployment benefits

Since the outbreak of the coronavirus pandemic, tens of millions of Americans have filed for unemployment. Joblessness is at its highest since the Great Depression, and the job market has been slow to fully rebound. The federal government backstopped unemployment with an additional $600 weekly bonus, but that expires at the end of July.

As a result, many people are dependent on unemployment benefits to survive. Unemployment has replaced wages for millions of workers whose jobs simply vanished when businesses shut down in March. There are debates raging on how or if to extend unemployment benefits, but Americans on unemployment will be impacted in another way: taxes.

How Unemployment Affects Your Taxes

Unemployment benefits – whether standard or the additional boost through the CARES Act – are taxable income. That means that any money you receive from unemployment will be lumped in with and taxed like the rest of your income. Certain states do not levy any income tax on unemployment benefits (California, Montana, New Jersey, Oregon, Pennsylvania and Virginia), and others have no income tax at all, so whether you need to pay or not depends on where you live.

However, there are different ways to pay taxes on your unemployment benefits. First would be having your taxes automatically withheld, as they would be on your income. You’ll need to file a Voluntary Withholding Request, and the taxes will be taken out before you get the benefits. You’ll obviously receive less money with each check, but there’s a lower chance you’ll end up owing money when you file.

You can also wait to pay until you file your 2020 taxes. The obvious benefit is that you have more money in the short term to cover living costs, but you may end up owing a hefty sum on your next return. The middle ground option is making estimated payments – roughly calculating what you owe quarterly and paying every three months – but you may of course pay the wrong amount.

The Bottom Line

In most states, unemployment benefits are not tax-exempt. Simply knowing that is critical, as it allows you to evaluate your situation and weigh your payment options. Whatever you do, be sure to pay back the taxes on your unemployment benefits by the end of the tax year!