What to Do When You Receive Unemployment Benefits

With record-high unemployment claims due to COVID-19, many have been filing for unemployment benefits. The money you receive is considered as income so therefore it will be taxed at your federal income tax rate as well as, if applicable, state and local income taxes. Though you are not obligated to have taxes withheld from your unemployment benefits check, it is a good idea to do so. Rather than paying on Tax Day, it is better to pay upfront, so you can budget and plan accordingly.

States that Don’t Pay Unemployment Benefits

If you reside in any of the following states mentioned below, you are excluded from reporting your unemployment benefits as state income tax.

Waive unemployment benefits from income taxes: California, New Jersey, Oregon, Pennsylvania, and Virginia

States that don’t have income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming

States that have income taxes for investment income: New Hampshire and Tennessee

How to Pay the Tax

When you first file for unemployment, you should have an opportunity to make the election with your state unemployment office to withhold federal taxes. If you are already receiving unemployment but did not make the election to do so, contact your local unemployment office and request withholding of federal and state taxes. You will need to file a Form W-4V. A flat federal tax rate of 10% of the benefits paid can be withheld with each payment.

Another option you can do is to make estimated tax payments to the IRS and your state tax agency every quarter.

The last option you can do is, if you don’t expect to owe any taxes, you can choose to keep all your employment benefits. It would be beneficial for you to keep a small portion aside just in case you do end up owing taxes. This is especially important with the increased federal unemployment benefit paid this year. We expect that this will affect many refunds next year.

If you do end up paying too much in taxes, you will be able to get a refund once you file your tax return. Even if you are not required to file, it would be advantageous for you to receive the money you withheld from the unemployment benefits. If you have any questions, please contact our office and we would be glad to assist you.

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