With tens of millions of Americans relying on unemployment benefits during the pandemic, many may face a tax bill — or smaller refund — this season if they haven’t withheld enough during the year.
Unemployment benefits are taxable and have to be reported on your 2020 taxes, both on federal and on state returns. They are considered earned income and are taxed the same way.
“People receiving unemployment benefits are hard on cash and don’t put aside the money for the unemployment income,” Lewis Taub, a certified public accountant and New York director of tax services at Berkowitz Pollack Brant Advisors, told Yahoo Money. “They do get hit unexpectedly hard when they actually have to pay their tax bill.”
Withholding taxes on your unemployment benefits is voluntary — recipients can choose to withhold a flat rate of 10% of their unemployment benefits. If they haven’t chosen to withhold any tax, they’d have to pay it at once when filing their taxes. Still, even if they withhold, they may need to pay more in taxes.
Not only did millions of Americans rely on unemployment benefits last year during the pandemic, but the programs were more generous — meaning that their tax bill could be higher than usual. Access to unemployment benefits was expanded to self-employed workers and contractors under the Pandemic Unemployment Assistance (PUA) program and unemployed workers were given additional weekly benefits on top of their regular benefits at different stages in the pandemic.
Even if you received unemployment benefits, that doesn’t mean you will necessarily owe the IRS. But it could mean you’ll get a smaller refund than past years.
People who got unemployment benefits in 2020 should have a Form 1099-G from their state to help them fill out their taxes properly. Many states don’t mail the form, so taxpayers should go to their state website to access the form.