Don’t Forget About Unemployment Benefits Taxes

Although the US economy added 1.8 million jobs in July , the country is suffering as the unemployment rate is in double digits. If you are one of the roughly 30 million Americans receiving unemployment benefits right now, you may be looking forward to an update on the latest round of stimulus talks, but tax experts say there is another looming problem you should be aware of.

If you are receiving unemployment benefits, you may not realize that you have to pay federal and state taxes on that income. (The same goes for any severance pay you may have received from your former employer.) According to a recent Credit Karma survey , 27% of unemployed Americans do not think their benefits are taxed.

Another common scenario: The Hill reports that some people have opted out of withholding taxes because they need money from a larger unemployment check right now. And even if you chose to withhold taxes when applying for unemployment benefits, experts warn that the deductions may not be enough to cover your tax arrears. This could result in less tax refunds next April, or worse, an unexpected tax bill.

How to pay taxes on unemployment benefits

If you are receiving unemployment benefits and are not withholding taxes, do not panic. There are several ways to tackle this problem – and potentially avoid the tax bomb next spring.

Start by contacting your local employment office. You can fill out Form W-4V – Voluntary Withholding Tax Application – and send it to your local office. This will allow you to start withholding federal and state taxes (if applicable). Depending on local regulations, you can also make changes every two weeks when recertifying for benefits. The flatfederal tax withholding rate is 10% .

You can also make estimated quarterly tax payments online through the electronic federal tax payment system . You can read more about the process, including how to calculate the payment amount, here . The last option is to set aside the money so they are ready to pay the bill next year. You can use the free IRS tax lien tool to figure out how much you need to save.


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