In recent months, numerous Americans have lost their jobs due to the flagging economy. As a result, a record 36.5 million people have applied for unemployment benefits to make ends meet. The federal government even passed legislation to ease the restrictions on unemployment benefits, allowing more people to receive them.
If you received unemployment checks this year, you are probably wondering how this will affect your income taxes. Do not panic about the impending July 15th tax deadline—you will not have to pay taxes on unemployment benefits until next year. Still, it is never too early to figure out how unemployment benefits will affect your taxes.
How to pay taxes on your unemployment benefits
The Internal Revenue Service (IRS) considers unemployment benefits taxable income. Because Washington State does not have a state income tax, you pay only federal taxes on your benefits. You will pay the same federal income tax rate that you usually pay.
You have three options for filing taxes on your unemployment income:
- Request tax withholding
Your first choice is to have your federal taxes withheld from your benefit checks. The downside is that the amount you receive in your checks will not be as high. The upside is that you will not have to withdraw a chunk of money to pay your income tax when you file.
- Pay quarterly estimates
You can estimate your quarterly earnings from unemployment benefits and pay taxes on this amount. However, if you underestimate your quarterly amounts, you will have to come up with the additional amount come tax day.
- Pay when you file your return
If you prefer, you can pay your taxes all at once when you file your 2020 tax return. This option lets you receive greater unemployment benefit sums throughout the year while providing the convenience of paying your taxes in one fell swoop. Beware, though, that you will have to come up with the full amount of taxes you owe or face a penalty.
Your situation is unique, and only you can decide which method you prefer. Because taxes are already incredibly complex, even without the added complication of unemployment benefits, thrown in the mix, you may wish to work with a tax attorney.