Collecting unemployment? Here’s How It Will Impact Your Taxes

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Are you collecting unemployment? As of June 2020, the unemployment rate in America was at an estimated 13.3%. That’s down from 16% and those numbers don’t even reflect the scale of how many have had their income cut or lost their job due to the COVID-19 virus.

We’ve just passed the July 15 extended tax filing deadline. With that behind us, it’s time to focus on the 2020 tax season. Being already July, that means that the tax season is half over already. Time flies when you’re fighting a pandemic.

One of the biggest issues in the 2020 tax season will be the massive number of people that were on unemployment for several months during 2020. The number of people on unemployment broke records this year.

For many, that means that they’ll have to pay taxes off their unemployment income. We’ll break down how, why, who, and what you’ll need to know about paying taxes on unemployment so you aren’t surprised come April 2021.

What options do I have to avoid a large federal tax bill next year?

You have a couple different options to avoid a large tax bill for the 2020 fiscal year. We’ll break them down for you.

Automatically Withheld  

This is the easiest option for many. When you sign up for unemployment benefits, you’ll likely have the option to get taxes withheld.

If not, you can fill out a Form W-4V, which will ensure you’re being properly taxed on your unemployment benefits.

Estimated Quarterly Payments  

Freelancers and sole proprietors always have the option to pay taxes quarterly so they aren’t hit with a massive tax bill come April. You can do the same thing with unemployment benefits.

The catch is, you need to estimate how much you owe on your own using a IRS Form 1040-ES. If you underpay these quarterly taxes, you may be penalized. While a massive tax bill in April may seem daunting, consider if you need the money you would pay on quarterly taxes would be better used for rent, food, etc. It’s not worth not being able to afford housing, utilities, etc just to ease your tax burden next year.

Who doesn’t have to pay state taxes on unemployment?

There are a handful of states where unemployment income is not considered income. Here are the states that directly wave unemployment for state taxes:

  • California

  • Montana

  • New Jersey

  • Pennsylvania

  • Virginia

Then, there are nine states without a broad income tax that don’t tax jobless benefits. They are:

  • Alaska

  • Florida

  • Nevada

  • New Hampshire

  • South Dakota

  • Tennessee

  • Texas

  • Washington

  • Wyoming

If you are in one of these states, it’s likely you won’t have to pay state taxes on your unemployment. Be sure to check with a tax professional to make sure.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.