The US economy has taken a considerable hit following the Covid-19 pandemic, which sadly means that millions of people have filed for unemployment. Anyone who falls into this category must be aware of the tax implications here. Knowing whether and to which extent unemployment benefits are subject to taxation can help maximize funds available for living expenses and avoid a large tax bill during tax season.
Unemployment Benefits Are Taxed
Taxation differs according to the state of residence. Unemployment benefits are not subject to Social Security or Medicare tax, nor are they taxable on a California income tax return, although some other states do tax them.
How The Tax is Calculated
Taxation is worked out in various ways. Refer to the following information:
If 10% of benefits are withheld for federal taxes: IRS Form W-4V should be completed and submitted to the nearest unemployment office. This document simply states that the applicant is voluntarily “giving up” 10% in order to pay any taxes in the future. Generally speaking, this is the preferred and safest method to avoid a large tax bill during tax season.
If the applicant does not want to have their taxes withheld: Although this means there are more funds available every month, the tax will still have to be paid. Form 1099-G, which shows the total unemployment benefits received, will need to be submitted at the start of 2021. The tax owed will then have to paid in a lump sum.
If the applicant wants to add their unemployment benefit to their income: This allows a tax return to be filed as usual and gives the option to “pay as you go” instead of receiving a large tax bill after April 2021.
If an employee wants to pay into a private unemployment benefit fund: This method is probably the best solution for a union member. However, the benefits obtained are taxable if the employee receives more than they pay into the fund.
Anyone who has already applied for unemployment benefits and the withholding option can still change this method by completing Form W-4V and then submitting it to their local office.
In Conclusion
It is recommended that the receiver of the benefits chooses to have 10% of the unemployment benefit withheld unless the full employment check is definitely required to meet the family’s living expenses.
