If you lost your job in the past year, you're not alone as the ongoing coronavirus pandemic has continued to impact employment. However, as of January 2022, the unemployment rate sat at 4%, and the number of unemployed individuals was 6.5 million. This number is significantly lower than the same time in 2021, when the unemployment rate was 6.3%, and the number of unemployed individuals was 10.1 million. Still, while the economy is adding hundreds of thousands of jobs and jobless claims decline, millions still collect unemployment benefits.
Generally, unemployment benefits count as taxable income, but for the 2020 tax year, the American Rescue Plan Act (ARPA) included a provision that made the first $10,200 of unemployment compensation earned in 2020 tax-free for taxpayers with modified adjusted gross incomes of less than $150,000. The provision was not extended for the 2021 tax year, and that means you'll need to pay taxes on unemployment income earned in 2021 when you file your tax return in 2022.
- Unemployment benefits are received through a joint state-federal program that provides compensation to eligible workers who are unemployed through no fault of their own.
- Federal income tax is withheld from unemployment benefits at a flat rate of 10%.
- You can use IRS Form W-4V to have taxes withheld from your benefits.
- You might be required to make quarterly estimated tax payments directly to the IRS if you elect not to have taxes withheld.
How Do Unemployment Benefits Work?
Unemployment is a benefit paid by state or federal governments to help people who have lost their jobs through no fault of their own. It does not apply if you quit your job or were fired for cause.
If you believe you are eligible for unemployment, you would contact your state's unemployment insurance program to apply for unemployment benefits. Certain limitations apply as to the amount you're eligible to receive, and they can vary by state.
Unemployment taxes are paid by employers and these taxes go into a state fund to aid workers who have lost their jobs. The U.S. Department of Labor (DOL) monitors the system.
Withholding Taxes From Unemployment Compensation
The IRS views unemployment compensation as income, and it generally taxes it accordingly. You can elect to have federal income tax withheld from your unemployment compensation benefits, much like income tax would be withheld from a regular paycheck.
Unfortunately, you don't have a choice as to how much you want to be withheld. Federal income tax is withheld from unemployment benefits at a flat rate of 10%. Depending on the number of dependents you have, this might be more or less than what an employer would have withheld from your pay.
You can use Form W-4V, Voluntary Withholding Request, to have taxes withheld from your benefits. Complete the form and give it to your unemployment office.
Making Estimated Tax Payments
You might be required to make payments directly to the IRS as quarterly estimated tax payments if you elect not to have taxes withheld from your unemployment benefits. This works out to a payment once every three months. You can elect to do this instead of having 10% withheld from every unemployment check, giving yourself a little bit of wiggle room when money is tight.
You might even have to make quarterly payments in addition to withholding from your benefits. You're obligated to make estimated payments if you expect that you'll owe at least $1,000 after accounting for all taxes withheld from all your sources of income, and if you expect that your withheld taxes plus any refundable tax credits you're eligible for will be less than 90% of what you'll owe, or 100% of the total taxes you paid last year.
You might want to consult with a tax professional because the whole equation can be complicated. You could accrue additional penalties if you don't pay enough tax, either through withholding or estimated tax payments.
Reporting Unemployment Income for Taxes
Your state's unemployment agency will report the amount of your benefits on Form 1099-G. The IRS gets a copy, and so do you. The form will also show any taxes you had withheld.
The IRS reminds taxpayers there are different types of unemployment compensation in non-pandemic years, and most are taxable. The IRS offers an interactive tool on its website to help you determine whether the income you receive while unemployed must be reported on your return. You can take some steps to pay throughout the year if it is, so you can avoid owing the IRS taxes or penalties at tax time.
The Bottom Line
Your unemployment income will be taxed right along with any other income you might have earned during a calendar year.
Use Form W-4V to withhold any tax from your unemployment income, or pay quarterly taxes to ensure you don't owe the government any penalties come tax season. And always consider working with a tax professional if you have questions about your specific situation.
Frequently Asked Questions (FAQs)
How do you claim unemployment benefits?
Unemployment benefits are offered at the state level. You'll need to contact your state's unemployment insurance program and follow its instructions for applying. In general, you'll need to complete an application that explains your situation and details where you worked, how long you worked there, how much you made, and why you're no longer employed. Your state's unemployment program will review your application and approve it, request additional information or an interview, or deny it. You can appeal if your claim is denied.
What can disqualify you from receiving unemployment benefits?
Each state has its own unemployment criteria and rules. Unemployment programs typically require you to be unemployed through no fault of your own and meet work and wage requirements. If you quit or were fired for cause, you usually don't qualify for unemployment. Self-employed people and contract workers usually aren't eligible for unemployment benefits, but the CARES Act allowed states to extend unemployment benefits to these individuals.