Since the beginning of the Covid-19 pandemic, about 36 million applications for unemployment benefits have been filed. According to the Washington post, 1.5 million workers filed for unemployment insurance during the second week of June alone, which is the highest in decades.
You might be wondering what makes someone eligible to receive unemployment benefits. The US Labor Department states you are eligible to file for unemployment benefits if you are terminated from your job when the fault isn’t yours. Even though every state has its own policies regarding unemployment benefits, one general rule is that a person must have been working for a certain period of time before losing his job. While the majority of the states provide unemployment benefits lasting for 26 weeks, there are seven states that provide this compensation for a lesser time duration. For example, North Carolina and Florida only offer a 12 weeks long compensation whereas Missouri has a policy of providing unemployment benefits for 13 weeks. Usually the payment is made on a weekly basis by the state where the person was last employed.
With the above facts, you might think it’s a win-win situation where you get compensation even when you are not employed anymore. But this is the half of what you need to know!
Unemployment Is Taxed
The confusion that follows is; why is unemployment taxed? The simple answer is that unemployment benefits are considered as regular income by the federal government which has to be taxed. However, an exception is of not having to pay the Medicare and Social Security taxes on unemployment benefits. The state paying you unemployment benefits will issue you a Form 1099-G by the coming January, mentioning the compensation you’ve received and the amount of tax that has to be paid.
Having to pay tax is hard. If you don’t want to end up paying more than what you owe, consider hiring a tax specialist.
Do states tax unemployment benefits?
As it is clear that federal government considers unemployment benefits as regular income which is taxable. However, talking about paying income tax to states, it differs from state to state. Most of the states follow federal government in this regard and unemployment benefits are taxed completely. Whereas some states have no tax on these benefits (because of no income tax policy) while in others, the tax is only applicable to a part of unemployment benefits such as Indiana.
Alabama is one of the states with no tax on unemployment benefits and so is Alaska. The tax on unemployment compensation in Arizona is the same as fixed under the federal government.
3 ways to pay tax on unemployment
You can choose to pay tax on your unemployment benefits by one of the three ways according to what suits you best.
Have your taxes withheld
A form W-4V (Voluntary Withholding Request) has to be filed in order to have your federal as well as state income tax withheld from the unemployment compensation that you are going to receive, same as it used to get deducted from your paycheck.
While you may think of it as the smartest way to avoid paying a huge bill in future, don’t forget to consider your current financial situation before opting for it. Which means it is not a wise idea if you are already short on cash.
Estimated quarterly taxes
You may also decide to pay estimated tax on your unemployment benefits after every three months. This way you will be saved from paying a huge sum when filing your income tax returns.
Nevertheless, you might end up paying too much or too little and in the latter case; you will have to pay a penalty.
It is good to hire a professional tax consultation service that can help you understand what suits you best.
Paying them later
You can even decide to pay the tax on your unemployment benefits later along with your income tax returns. This enables you to save the money and use it for your current expenses however; you will eventually end up owing a large amount as tax while chances are that you might not have enough money to pay it altogether.
Stimulus payments and taxes
People are receiving stimulus payments under the CARES act, according to which 13 weeks of additional unemployment benefits are granted making it a total of 39 weeks in most states. These stimulus payments are not considered as taxable but a refundable credit of your income tax return. Therefore, this income will not be taxed at the year end. It will be considered as a tax credit when you will file your next tax return.
This $2 trillion emergency relief package is the largest in American history, where the government has decided to pay an additional $1200 cash payment to each American who qualifies for the criteria as well as some extra amount to children and married couples. 159 million stimulus checks have been sent by the IRS so far.
The eligibility criteria for receiving stimulus checks
- Having a Social Security number.
- A Single filer’s earning has to be less than $99000 while for the head of the household it must be below $136,500 to qualify for the criteria. For married couples, it has to be less than $198,000 for the most recently filed tax returns.
- A person who is not claimed by someone as a dependent is eligible to receive a stimulus check.
- Those who have filed their tax in 2018 or 2019 a well as those who don’t earn the needed amount to file for a tax but they are receiving other federal benefits like Social Security, disability or retirement benefits are also eligible.
Looking for a free consultation? We are just a call away. Contact us at MI Tax CPA, and our tax consultants are ready to guide you through all your tax related queries.
