Unemployment compensation is considered income, and you're responsible for paying taxes on it.
As the coronavirus halted operations for businesses across the country, millions of employees were suddenly furloughed or laid off from their jobs. Others had their hours significantly cut, leaving them underemployed. Within a span of six weeks, a staggering 30 million people applied for unemployment benefits.
Yes, Unemployment Benefits Are TaxableUnemployment insurance is a joint state-federal initiative. Each state administers its own benefits program, but all states follow guidelines set forth by the federal government. If you receive unemployment benefits, the money is considered income by the Internal Revenue Service.
If you receive unemployment payments at any point during the year, you will get a Form 1099-G at tax time from your state government. This document reports certain government payments you received, including unemployment; state or local income tax refunds, credits or offsets; taxable grants; and more. When it comes to unemployment benefits, you can see the total amount of compensation you received for the year in Box 1, as well as any federal tax withheld and state tax withheld .
Request to have taxes withheld. “The U.S. tax system is a pay-as-you-go system, so individuals are expected to pay taxes throughout the year,” said Mark Jaeger, director of tax development at TaxAct. Usually, federal and state withholding on regular W-2 income from an employer satisfies that requirement.
Pay up in April 2021. Finally, you can simply wait until you complete your return for the year 2020 and pay your tax bill when you file. However, you will likely end up having underpaid your taxes this way, which will result in a penalty if you owe more than $1,000 for the year.
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