Can Your Unemployment Benefits Be Taxed?

Can Your Unemployment Benefits Be Taxed?

( – So far this year, 50 million Americans filed for unemployment benefits over the last 5 months due to COVID-19. It doesn’t take a scientist to remind anyone that these are not normal times.

However, normal or not, there are still two guaranteed things one can expect. At some point, we’re all going to die, and in the meantime we still have to pay our taxes.

It may not be fun to think about filing 2021 taxes right now, but for those collecting unemployment benefits, it’s important to be aware of the tax liability.

Over the last few months, many people needed money immediately to pay the mortgage or rent, car payments, utilities, and buy groceries. They may also have chosen not to have taxes withheld from their benefits just so everyday living expenses could be met. Even if a recipient wanted to have taxes withheld, it still might not cover all the taxes owed. 

Recipients of unemployment benefits don’t owe a payroll tax. However, a federal income tax is still due. Some states also collect income taxes from unemployment benefits.

It’s recommended that taxpayers try to save 10% of the benefits they received to pay federal taxes in 2021. By February, state unemployment departments will issue IRS Form 1099-G to every person who collected unemployment benefits in 2020. Think of it as a W-2 from the government.

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