Receiving extra coronavirus unemployment benefits? How to avoid a big tax hit
The benefits are taxable at the federal level and by most states
FOX Business’ Cheryl Casone breaks down the latest jobless claims report, which came in at 3.17 million.
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More than 33 million American workers are currently collecting unemployment benefits as a result of the coronavirus-induced lockdown throughout the nation — but that money, including the extra $600 weekly payment, is not tax-free.
Unemployment benefits vary by state, but the massive economic-relief package signed into law at the end of March sweetened the aid for all beneficiaries with an additional $600 per week until July 31, 2020. As long as you qualify for state benefits, the $600 payment will be added to your weekly pay.
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Some states offer fewer weeks of benefits than others, but under the stimulus plan, anyone who’s out of work when their state benefit period concludes will be eligible to receive payments for another 13 weeks from the federal government.
But the benefits are taxable at the federal level and by most states (California, New Jersey, Oregon, Pennsylvania and Virginia are the only to completely exempt it), meaning recipients could still wind up with a tax bill next year, despite losing their job. You do not have to pay Social Security and Medicare taxes on your unemployment benefits.
The total amount of income you receive and your filing status will determine whether or not you need to file a tax return.
The ranks of out-of-work Americans are expected to continue growing in the coming weeks. In just April, a record-shattering 20.5 million Americans lost their jobs, pushing the unemployment rate to 14.7 percent, the highest since the Great Depression.
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"I don't know if it's as bad as it gets," Larry Kudlow, President Trump’s chief economic adviser, told FOX Business on Friday. "I don't think this pandemic contraction has yet fully run its course."
To avoid an unexpected tax hit next year, recipients have two options:
Have taxes withheld:
When you first receive benefits, your state government will provide you with an IRS Form 1099-G. You can choose to have income taxes withheld from your compensation at this time (the total federal tax withheld will appear in Box 4, and the state tax withheld will appear in Box 110.)
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If you are already receiving the payments and want the government to automatically take your tax obligation from the money before you receive it, as it does with a typical paycheck, then you need to file Form W-4V. This informs the payor (the state government) to withhold 10 percent from your check for federal income tax.
Make quarterly payments to the IRS:
If you’d rather not have your taxes withheld by the government, you can opt to make the estimated payment every quarter. To do so, beneficiaries will have to calculate their obligation and meet payment deadlines every three months. Undershooting how much you owe or missing a deadline could result in a penalty charge.