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The COVID-19 pandemic has disrupted many parts of our lives. But there’s one annual ritual you still can’t escape: paying your taxes.
For millions of Californians, this year’s tax return will include a less common form of income — unemployment benefits.
Taxes can be confusing even in the best of times. And only more so if you spent last year in-and-out of work, collecting income from multiple sources, including California’s unemployment agency.
We’ve put some common questions about unemployment benefits to tax experts in Los Angeles. Hopefully these answers will make filing a bit easier after a tough year.
Wait… I have to pay taxes on my unemployment benefits?
Yes, unemployment benefits are taxable. This can understandably come as a shock to those who find the whole unemployment system confusing. But unemployment checks are considered income, and you’ll have to report that money when you file.
But there’s good news if you live in California. Of all the states that levy a state income tax, only a handful exclude unemployment benefits, and California is one of them. However, federal income tax still applies.
How much you owe will depend on how much income you collected last year — from unemployment, W2 employment, freelancing, investments, etc. — and what tax bracket you fall under based on that income.
Do I have any withholdings?
Types Of Unemployment Tax Breaks
In the past, you could deduct a number of expenses related to your job search, like transportation, relocation costs, and seminar fees. Unfortunately, these deductibles were eliminated by the 2017 Tax Cuts and Jobs Act. But there are still certain ways you can find financial relief during unemployment.
Your Tax Responsibilities When Youre Unemployed
When youre out of work, unemployment benefits can help keep you going financially hopefully until you can find another job.
Unemployment benefits can come from multiple sources, including the following:
- The Federal Unemployment Trust Fund
- State unemployment insurance
- A company-financed fund
- A private fund to which you voluntarily contributed
Generally, unemployment income is taxable as income at the federal level and may be at the state level, too, depending on where you live. But if you receive unemployment benefits from a private fund;that you voluntarily contribute to, its only federally taxable if the benefits you receive exceed the amount you paid into the fund.
In addition to paying tax on unemployment benefits, if you worked part of the year before losing your job, you may also be responsible for paying federal income tax on those wages, as well.
Typically, employers withhold federal and state taxes from wages, based on how much you earned and information you provided on your W-4 form. Whether you owe any additional tax on those wages will depend on the selection you made on your W-4 form and whether your former employer withheld enough federal income tax from your paycheck. If they took out too little, you could owe taxes on that income when you file your returns.
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Your Best Option: Have Taxes Withheld
Upon request, you can have taxes withheld directly from your unemployment check. This is the preferred strategy, because it’s automated and the estimated taxes never hit your checking account. The state will hold back a percentage based on how it taxes unemployment, plus another 10% to cover your federal;taxes.
Unfortunately, the 10% federal withholding may be more or less than your actual tax rate. If 10% is higher than necessary, you’ll have lower cash flow today, but you will get a refund next year. If the 10% is too low, you may need to make quarterly tax payments to supplement those withholdings.
You can evaluate the 10% by using the IRS tax withholding calculator or IRS Form 1040-ES to estimate your tax liability. You’ll have to make a few assumptions about your income for 2020, but you can run several scenarios to see how those assumptions change what you owe. If it looks 10% withholding on the unemployment isn’t enough, plan on picking up the slack with quarterly tax payments.
Information For People Who Already Filed Their 2020 Tax Return
This law change occurred after some people filed their 2020 taxes. For taxpayers who already have filed and figured their 2020 tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation. Any resulting overpayment of tax will be either refunded or applied to other taxes owed.
The agency will do these recalculations in two phases.
- First, taxpayers who are eligible to exclude up to $10,200.;
- Second, those married filing jointly who are eligible to exclude up to $20,400, and others with more complex returns.
Taxpayers only need to file an amended return if the recalculations make them newly eligible for additional federal tax credits or deductions not already included on their original tax return.
For example, the IRS can adjust returns for taxpayers who claimed the earned income tax credit and, because the exclusion changed their income level, may now be eligible for an increase in the EITC amount.
However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but are now eligible to claim them following the change in the tax law. Taxpayers can use the EITC Assistant to see if they qualify for this credit based upon their new taxable income amount. If they now qualify, they should consider filing an amended return to claim this money.
These taxpayers may want to review their state tax returns as well.
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You May See These Codes On Your Tax Transcript: 971 846 And 776
Some taxpayers who’ve accessed their transcripts report seeing different tax codes, including 971 , 846 and 776 . Others are seeing code;290;along with “Additional Tax Assessed” and a $0.00 amount. Since these codes could be issued in a variety of instances, including for stimulus checks and other tax refunds or adjustments, it’s best to consult the IRS or a tax professional about your personalized transcript.;
Planning For 2021 Taxes If Youre Still Unemployed
The tax exemption for $10,200 in unemployment benefits currently only applies to unemployment income you collected in 2020, even though the bill also extended weekly $300 federal unemployment benefits payments through September.;
You should consider any unemployment benefits you receive in 2021 as fully taxable. If you can afford to do so, avoid a surprise bill and penalties next tax season by electing to have taxes withheld from your weekly benefits payments or by paying quarterly estimated taxes throughout the year.
You can elect to have 10% of your unemployment benefits withheld from your weekly check. Even if you did not select this withholding on your original claim, you can file Form W-4V with your states unemployment office to begin 10% tax withholding on future unemployment payments.;;
You can also forgo automatic withholding and instead pay estimated quarterly taxes on your unemployment income. Use Form 1040-ES to figure and file your quarterly payments. If you choose to pay estimated taxes on your unemployment benefits, the first payment is due April 15, 2021.
What Kind Of Unemployment Documentation Do I Need For Filing My Taxes
If you received unemployment benefits in 2020, EDD should have already sent you your 1099G form, which is a record of the total taxable income EDD has issued to you in a calendar year.
If you havent gotten this form for some reason, you can print one or request a paper copy through your UI Online account on EDDs website.
EDD recommends that if your 1099G form shows a $0 amount, you should call 1-866-401-2849 You can also report form problems online.
Will States Waive Taxes Too
Some states are expected to change their tax law to follow the federal guidance. States such as Alabama, California, Montana, New Jersey, Pennsylvania and Virginia already exempt unemployment benefits from taxation. Other states that usually tax unemployment may decide not to do so this year.;
ExtendPUA.org is pushing for all states to follow the federal government’s lead and exempt unemployment benefits from taxation, Freed said.;
“I’m a New Yorker and I still have a significant tax bill from state and local taxes,” she said. “A lot of states follow federal guidance so they will include that forgiveness, but there’s about 12 that don’t. New York is one of them and it has some of the highest taxes in the country.”
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Taxes On Unemployment Benefits
At the end of the year, the unemployment insurance office for your state will send you a Form 1099-G, which shows the total benefits you received during the year, as well as any taxes withheld from those benefits.
Report unemployment compensation on Line 19 of IRS Schedule 1 , and add this amount to other income you may have listed on Lines 1 through 21. Total Lines 1 through 21, and enter this figure on Line 22. Transfer the total on Line 22 to Line 6 of your 1040, unless you have other adjustments to income, according to the directions for Schedule 1.
After taking any tax deductions to which youre entitled, you figure the tax you owe on your adjusted gross income. Unless you were unemployed for only a short time, or you have a lot of deductions, youll probably owe taxes if you didn’t opt for unemployment withholding from your benefit checks.
Right Now There Are Two Options For Paying Taxes On Unemployment Income
As for the money I’m pretty sure I owe? Turns out my options are slim: pay the lump sum in one fell swoop, or get going with a payment plan.;
You can enroll in an installment agreement with the IRS online ; most states will simply issue a bill for the balance due and you can start making payments right away. Sound too good to be true? It is.;
“The disadvantage, of course, is that they charge interest,” Hawver reminded me, noting that ; in the case of the IRS it’s currently a whopping 14%. In her experience, Hawver has seen an increase in a new trend: using a credit card to pay off tax debt. “It may be cheaper to pay off the IRS and pay off through a credit card” if you have a 0% interest rate or a standard rate lower than 14%.
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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.
Where Can I Find Free Or Low
Spivey said one of the main questions shes getting lately is: “Who can still help me?”
Thats because a chunk of the free and low-cost support services close up shop on April 15, despite the deadline extension to May 17.
There is year-round tax help through groups like Tax-Aid. And though Spivey said there are no guarantees, with California planning to reopen its economy in mid-June after over a year of COVID-19 restrictions, you may also stand a better chance of finding in-person tax help in the coming months.
Spivey will also be holding on behalf of the clinic on April 22 at 10 a.m.
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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.
Reporting Unemployment Benefits At The Federal Level
- In Box 1, you will see the total amount of unemployment benefits you received.
- In Box 4, you will see the amount of federal income tax that was withheld.
- In Box 11, you will see the amount of state income tax that was withheld.
In certain states, you will not automatically be mailed a Form 1099-G. You will have to access your Form 1099-G online through your unemployment portal or call your state unemployment office to request that they mail your Form 1099-G. In other states, you will only be mailed a Form 1099-G if you selected that as your delivery preference.
|States that will not mail 1099-Gs at all||Connecticut, Indiana, Missouri, New Jersey, New York, and Wisconsin|
|States that will mail or electronically deliver 1099-Gs depending on which option you opted-into||Florida, Illinois, Michigan, North Carolina, Rhode Island, Tennessee, and Utah|
If you received Form 1099-G, but didnt file for unemployment benefits, this may be a case of identity theft and fraud. Contact your state unemployment office immediately for additional information and how to report the potential fraud.
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You May Be Able To Deduct Job
Job-hunting expenses are deductible as miscellaneous deductions on your tax return. Youll need to have substantial job-hunting or other miscellaneous deductions before they actually reduce your income tax bill.
You can only deduct your total miscellaneous deductions to the extent that they exceed 2% of your adjusted gross income.
However, if your income is much lower this year, you may reach that amount more quickly than you expect.
Keep track of your job-hunting expenses, such as transportation to interviews , subscriptions to online job search services, admission to job fairs, and resume consultations.
The Case For Forgiving Taxes On Pandemic Unemployment Aid
What You Should Know
- The $580 billion in unemployment insurance benefits paid out in 2020 are currently subject to federal income taxes.
- Millions of families will face surprise tax billssome ranging into thousands of dollarsas we head into tax filing season.
- Congress and the Department of the Treasury must exempt these benefits from taxation to support families facing sustained economic hardship.
As we write, Congress and the Biden administration are debating the size of a new relief package needed to aid struggling households and right the economy. Mostly unnoticed in the negotiation, though, is that, thanks to a decision by the Trump Department of the Treasury earlier in the pandemic, many hard-hit families who received unemployment insurance benefits in 2020 are now facing unexpected tax bills that could run to the thousands of dollars per family.1 At a time when millions are unemployed,2 when families continue to face food and home insecurity,3 Congress and the Biden administration must act urgently to prevent these surprise tax bills, and to allow millions who have already paid tax on their 2020 benefits to receive a timely refund check.
Not only will this surprise tax bill hurt many workers who cant afford it right nowtheres a strong legal argument that, according to current law these benefit payments should never have been taxed in the first place.
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I Never Received Form 1099
If you never received Form 1099-G, but you did receive unemployment benefits for the tax year, youre still obligated to report your benefits on Form 1099-G when you file your taxes. Failure to do so may result in heavy tax penalties and fees. Order the form on the IRS website, fill it out, and include it with your tax return.;
How Do Withholdings Work With Unemployment Income
“You arent required to take any tax withholdings from your unemployment,” said Spivey but you could have opted in to a flat 10% withholding previously.
Spivey said most people shes seen through her work havent had withholdings on their unemployment benefits. “I had expected that this was going to be a big problem for the 2020 tax filing season,” said Spivey, “but ultimately, I dont think its been much of an issue.”
She attributed that to the exemption thresholds put in through the American Rescue Plan.
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Do I Have To Pay To Prepare My Taxes If I Received Unemployment
No. If you made under $72,000 in 2020, you are eligible to file your taxes for free . Even if you made more than that, many tax preparation services now include a 1099-G as part of a simple tax return, which they will let you file free of charge.
But buyer beware: So-called free tax preparation softwares are often trying to push you to pay them more money.