Unemployment can be one of the hardest parts of a person’s life. Many have known the struggle of having to rely on unemployment benefits to live day to day.
Currently 3.6 percent of Americans are unemployed, that may seem a small number but that accumulates to just under six million Americans.
Six million puts into perspective how many people rely on the state to survive whilst searching for employment. Due to the COVID pandemic many more found themselves needing to seek help being it through loss of employment or loss of hours.
Due to the amount of payouts given during the pandemic many people were overpaid and now the states want their money back through payments.
To answer the big question, yes you are required to pay taxes on unemployment benefits. Like any wages, unemployment benefits are counted towards your income.
You must report them on your federal tax return, your state return however may be different depending on which state you reside in.
Regardless of which state you live in you must pay federal taxes on your income. People who received unemployment benefits may have had a smaller tax refund than in previous years due to all the extra payments.
If you do not pay taxes on your unemployment checks then your refund would be used to pay for the taxes that are outstanding and owed to the government, this will result in you gaining a smaller refund.
You may be wondering what a tax refund is and why you would be getting a smaller refund, to put it simply a tax refund is a reimbursement to taxpayers who have overpaid their taxes.
A statistic from the U.S. Treasury estimated that around three-fourths of US taxpayers are over-withheld, meaning they will receive tax refunds.
Unemployment Tax Break
During 2020, the American Rescue Plan waived any federal tax on amounts up to $10,200 of unemployment benefits per person.
The issue with the plan was the waiver came late into the tax season, meaning many Americans had already filed their tax returns. President Joe Biden had only signed the relief bill in March.
This bill coming three months into the tax year meant those who had already paid their taxes were entitled to refunds, the IRS decided to issue refunds to any who had overpaid their federal tax liability.
The IRS identified well over 10 million taxpayers who would have been eligible for the refund.
The IRS planned to release the refunds in stages through the summer; the first refund would be for single taxpayers with more simple returns. The people included in this payment were people who did not claim children or refundable tax credits.
No matter when a refund is paid the federal Treasury Offset Program allows for up to 100% of a tax refund to be seized to pay off any debts owed to federal and state agencies.
Do You Pay Income Tax?
When receiving your wage income from your job, you pay taxes on your wage via the wage withholdings. You can find how much tax will be withheld from your paycheck by checking your Form W-4.
This differs when you are receiving unemployment benefits you will have the same option to withhold taxes with your unemployment income.
But it is not automatically applied like it is with a wage. If you do choose to withhold federal taxes the percentage will be set at 10%.
Depending on your situation, the amount might not cover all of the taxes but at the very least you will pay some income tax on unemployment.
What options are available to you if you did not set up withholding?
Well, the first is if you are still drawing unemployment then you can start to withhold taxes by completing Form W-4V and then submitting the form to your state unemployment office.
The second choice presented to you is that if you need to catch up then you can pay ‘estimated taxes’. These payments can be made quarterly, this gives you another way to account for your tax payments throughout the year.
What Are Estimated Taxes?
Estimated tax is a quarterly payment of taxes for the year based off of the filer’s reported income for the period. This method of payment is most useful for those who are small business owners, freelancers and independent contractors.
These types of workers will not have taxes automatically withheld from their paychecks, this is due to being self employed, whereas most people have their taxes withheld by their employers.
Estimated taxes can be made for any type of taxable income that would not be subject to withholding. The income types are, earned income, dividend income, rental income, capital gains and interest income.
Does Unemployment Affect Your Tax Return?
Getting unemployment will affect your tax return. Paying taxes through withholding or estimated taxes will reduce what you owe during the tax period; it will also reduce the chance you will need to pay an underpayment penalty.
If you have not paid enough taxes through your unemployment benefit then you will end up owing taxes when filing your return. If you have paid too much then you will receive a tax refund.
So there you have it, hopefully you have learnt all about the incredibly fun world of taxes and unemployment benefits.
You now know that you can overpay your taxes whilst on unemployment and what you can do to get any money you overpaid back from the IRS.
With all the different taxes and all the different levels of taxation it can feel overwhelming taking in all the information related to payments especially when on unemployment and dealing with the stresses that can cause you.
Unemployment benefits can be a vital income source for you and those around you during a stressful time, when time comes round to the year’s tax period filing your taxes should now not be adding to any of your worries.