Americans Receiving Unemployment Benefits May Owe the IRS

The COVID-19 pandemic has caused millions of people to be out of work and seek unemployment benefits to assist during this extremely difficult time. Jobless benefits have been critical in keeping people afloat. But, as tax preparers, we are concerned that many recipients of these benefits may not be aware that this money is considered to be income and will be taxed. For many people, this may be the first time they have ever needed unemployment pay, so the entire experience is unknown. At Steward Ingram & Cooper PLLC, we are dedicated to keeping you informed so there won’t be major surprises when taxes are due next year.

The Basics of Unemployment Benefits

The money you receive as an unemployment benefit is considered by the IRS to be “income.” As income, it is subject to the same tax requirements as regular income from a job. It is not subject to payroll taxes, however. Payroll taxes include the taxes for Social Security and Medicare that are usually withheld from your paycheck. Also, not all states require state taxes on unemployment benefits, but it is required in  North Carolina.

Stimulus Checks

The $1200 stimulus payment is not considered to be income, so you don’t have to pay taxes on these checks. It is categorized as an advance refund of a 2020 tax credit. It is not a loan from the government and you do not have to pay it back.

FPUC Weekly Payments

The weekly Federal Pandemic Unemployment Compensation (FPUC) check of $600 that Congress authorized as part of the CARES Act is considered to be taxable income. States must include the FPUC payments when preparing Form 1099-Gs and must withhold taxes from both the weekly benefit amount and the $600 payment. This payment is being reduced going forward; however, at the time of this writing, it is uncertain what the amount will be.

How to Pay the Taxes

There are three ways that you can pay the taxes on your unemployment benefits.

Have the Tax Withheld

Just as you do with a paycheck, when you are a W-2 employee and not self-employed, you can have the tax automatically deducted from your benefits check by the state’s employment office. You have the opportunity to make this election when first applying for the benefit. If you are already receiving the benefit and did not make the election to have taxes withheld, you can contact your local unemployment office to request withholding of both federal and state taxes. To do so, you will complete a form W-4V and submit it to the local unemployment office. Note that only 10 percent of each unemployment payment can be withheld for federal taxes. 

Pay a Quarterly Estimated Tax

The second option is to pay an estimated tax each quarter, like free-lance and subcontract workers pay. If you choose this option, be sure that you submit payments separately to the state and to the federal government. This option requires a bit of effort on your part to stay on top of how much tax you owe and send it each quarter. If you miscalculate or miss payments, you will owe this tax when you file in April 2021 for 2020. If you think you may have trouble keeping up with this payment schedule, it would be best to avoid this option.

Pay the Tax In Full in 2021

The third option is to pay the tax in full when it is due in 2021 at tax filing. This could be a workable solution if you received unemployment for a short period of time. But, be aware that it could create increased tax liability if you didn’t pay throughout the year by withholding or quarterly payments. If this occurs, you could have a large bill in April 2021 at which time you may not have the means to pay if you haven’t saved enough money.

Speak to a Tax Preparer Today!

Our CPAs are knowledgeable about the taxation of all the benefits you may be receiving during COVID-19. We can help you steer clear of future tax troubles and issues. We serve Raleigh, Cary, Durham, Wake Forest, Apex, Garner, Wilson, and surrounding areas. If you would like us to help you navigate these unfamiliar waters, call us at  (919) 872-0866 or complete the form below to schedule a consultation.