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What You Need to Know About Paying Taxes on Unemployment Benefits

Are you one of the many millions of Americans who filed for unemployment in 2020? Have no fear since you’re not alone. However, it’s important to understand paying taxes on unemployment benefits.

While it’s been great for so many to receive the extra benefits from unemployment, it’s also really important to understand that it isn’t tax-free income.

That’s right.

You WILL owe income tax on unemployment benefits!

What does that mean?

You’ll receive a 1099-G for reporting all unemployment on your tax return. It is critical to understand paying taxes on unemployment benefits to avoid a nasty surprise tax bill come tax time.

As many of you might already be aware, the US is experiencing unemployment rates not seen since the Great Depression. Woah! That’s insane. If you’re not fortunate to have a remote business that’s made it through these tough economic times, no worries.

The US government passed the CARES Act to help boost unemployment benefits by an additional $600/week. This is also the first time in history that self-employed individuals qualify for assistance. That’s good news if you need the help but be aware of taxes!

Yes. That’s right. Those pesky taxes always seem to creep back to the forefront around here.

Oh, wait. This is a blog about taxes and I strive to make sure taxpayers are aware of tax obligations to help them avoid surprises.

With that, I’ll reiterate that unemployment benefits can be taxable income for both federal and state income tax.

There are a few states where you get lucky and they waive income tax on unemployment. They are:

  • California
  • Montana
  • New Jersey
  • Oregon
  • Pennsylvania
  • Virginia

Even though your unemployment benefits aren’t taxed by the state, you might owe federal income tax. I’m sure you’re also aware as an RVer of the seven states without an income tax —Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Plus, New Hampshire and Tennessee typically only tax dividends and interest.

However, if you’re unemployment benefits combined with any other income are less than the standard deduction, then there should be no need to worry.

Standard deduction looks like this for 2020:

Single: $ 12,400

Married Filing Jointly: $24,800

Head of Household: $18,650

If that’s not the case, then worry. No just kidding. You have some options.

Withholding or estimated taxes on unemployment benefits

If you haven’t been withholding tax from your unemployment benefits, you have options.

Save some of that money up just like you would if you self-employed. A specific amount from each check should go directly into a savings account specifically for taxes.

Hopefully, you’ve saved up some of those benefits. With those savings, you can make an estimated payment for the January 15 deadline. That will keep you on track with your taxes and the goal is to no owe penalties for failing to pay enough tax throughout the year. No one wants penalties, right?

Otherwise, you contact your unemployment benefits office and get the withholding updated so that at least going forward you’ll have some taxes withheld.

Paying Taxes on Unemployment Benefits

What if you didn’t have any taxes withheld nor did you save any of the money. Heck. You needed that money to put food on the table and a roof over your head.

The IRS has a tool to help you determine if your unemployment benefits are taxable. While it’s for tax years 2019, 2018 or 2017, you should still be able to get an idea if your benefits are taxable.

Otherwise, let’s walk through a little simplified tax planning to give you an idea of how much you might owe.

Example 1:

You are a married couple with a small business. However,  you lost the majority of your clients due to the times, and you collected unemployment benefits totaling $15,000. Your business still had a little income, a net profit of $15,000, prior to losing all your clients.

This makes your total income to be $30,000.

Total income $30,000

Standard deduction $24,800

Taxable income = 30,000 – 24,800 = $5,200

That would be you in the lowest tax bracket of 10%

Your total tax would be $520 (5,200 x 10%)

Keep in mind this is super simplified and it’s not factoring in self-employment taxes which are a whole different subject. It’s also not taking into consideration any credits or deductions you might qualify for.

Example 2:

You are single. You had a small business that lost all its clients and you were able to collect $20,000 in unemployment benefits. Your business had a net profit for the year of $10,000 since earned some money before the pandemic hit.

Total income = $30,000

Standard deduction = $12,400

Taxable income = 30,000 – 12,400 = $17,600

This puts you in the 12% tax bracket.

Your total tax would be $988 (9875 x 10%) + $927 ((17,600-9,875) x 12%) = $1,915

Again, both of these examples are VERY simplified and don’t factor in any self-employment that is owed on small business income. It also doesn’t factor in any state income tax if that applies to you nor does it take into consideration any credits or deductions you might qualify for.

If you haven’t figured out by now, you may very well owe income tax on any unemployment benefits. I urge anyone who collected these benefits to be aware of paying taxes on unemployment benefits.

Have questions? Ask them below.

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