Several clients of ours at Elite Tax Defense who are now receiving unemployment income were unaware that these benefits will be taxed as regular income.
There are now more than 40 million Americans who have lost jobs due to the coronavirus pandemic. Some are going back to work but many are not and of those not back to work, most are currently collecting unemployment benefits.
State unemployment benefits, as well as the additional $600 per week in coronavirus relief that Was provided by the federal government under the CARES Act through July 31, will factor into your taxable income on your 2020 tax return.
Here's what I highly recommend for anybody receiving unemployment benefits:
Ask to have taxes withheld if at all possible. Of course your first priority is paying your bills. However, if you can, you'll avoid a big tax headache next year by withholding now.
When you apply for unemployment benefits through your state agency, ask to have 10% of your payments withheld to cover federal income taxes. If you have the ability to do so, get the withholding in there as you’re signing up.
If you’re already receiving benefits, you can fill out an IRS Form W-4V, Voluntary Withholding Request, to adjust your withholding. You may also make changes to this on a biweekly basis when you’re asked to re-certify your unemployment claim.
Check with your state’s unemployment insurance program to make sure you follow the appropriate steps. The U.S. Department of Labor’s CareerOneStop website has links to every state’s program.