The economic downturn of the coronavirus pandemic that struck back in March left millions of Americans without jobs. Currently, more than 22 million people are collecting unemployment benefits — much of which is a direct result of the country shutdown. And while the CARES Act offered some relief to those impacted by the economy closure through increased unemployment benefits, there is one big caveat to receiving those payments that many recipients may have overlooked.
The fact is unemployment compensation doesn’t come tax free. Anyone who receives it, must pay taxes on that money. That’s right. It’s taxable income – even if it doesn’t feel like you “earned” it. If you received unemployment benefits in 2020 – or any year – you must pay your share of taxes on that money. But if you find yourself sitting here, worrying that you haven’t done so yet – don’t fret. There’s still time to catch up before the end of the year. There are a few different ways to do so. Let’s walk through the basics.
Unemployment benefits are taxable
The United States has a pay-as-you-go tax system, which means you must pay income tax as you earn income during the year. And while it may feel like unemployment benefits are not considered “earned income”, they actually are. You do not have to pay Social Security and Medicare taxes on the money like you do normal wages, but unemployment benefits are taxed by the federal government and possibly by your state depending on where you reside.
When you signed up for benefits, you may not have realized taxes could be withheld from your payments. Or maybe you opted to not withhold taxes and take home the full benefit amount instead. Either way, it’s important to understand your current situation now so you aren’t surprised with a large tax bill or a significantly smaller refund when it comes time to file your return. That’s because if you haven’t paid enough tax throughout the year, not only will you have to pay the amount you owe by the filing deadline, but you’ll also be subject to an underpayment penalty.
Time is still on your side
Thankfully, if you haven’t been paying (or saving) enough tax money to cover your unemployment income, there’s still enough time left in the year to make a plan and reduce any uncertainty.
First, take some time to evaluate your income from earlier in the year before you became unemployed. Analyze the tax money you withheld. Was it enough to cover the income you earned at that time? Was it more than enough? If it calculates out to cover more than you technically earned at the time, you can use what you already paid in to cover a portion of the taxes owed on your unemployment benefits.
Use that information to create an action plan for the remainder of the year. How much money do you still have to cover the tax on? If you haven’t withheld enough to cover all of your unemployment benefits, you still have options to help minimize the impact that may have on your return next tax season.
Opt to withhold taxes from your benefits
It’s tempting to opt out of withholding tax on your unemployment benefits. But foregoing that option is an expensive choice. TheContinue reading