Do I Have To Pay Taxes On Unemployment?

By Sam Slabyk
January 21, 2021
Chime is a financial technology company. Banking services provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC

The world seems to have turned upside down, and just when you thought everything was going to be okay, you’ve lost your job. Rent and utility bills will surely be due soon, and you’ve got to eat. After you recover from the initial shock, you’ll probably start running over your options. Maybe you’ll immediately crank up the side gig you’ve been neglecting or seek new job opportunities to replace your income.

Before your new plan starts making up for your recent income loss, it may be prudent to file for unemployment insurance. However, if you choose to go that route, you’ll have to consider how those payments could affect your taxes. For example, you may be asking, “Do I have to pay taxes on unemployment?” The IRS considers unemployment insurance as taxable income.  But unless you claimed benefits last year, you don’t have to include them in this year’s tax return. As for next year? It’s never too early to know what you’re getting into and plan ahead.

  1. Are You Eligible for Unemployment Insurance?
  2. Other Eligibility Considerations
  3. Should You Pay Taxes On Unemployment?
  4. What about the CARES Act?
  5. How Much Tax Should You Pay On Unemployment?
  6. How to Pay Unemployment Tax
  7. What if You Can’t Pay Your Tax On Time?
  8. The Bottom Line

Are You Eligible for Unemployment Insurance?

Millions of people filed for unemployment benefits in 2020 — but not everyone was eligible. To qualify for unemployment, you should have lost your job “through no fault of your own”. If you quit or were fired for cause, then you’re not eligible. Each jurisdiction has other slightly different requirements. For example, you may have to have been employed for a certain period, earning a set minimum amount before losing your job. A clearly set criterion determines whether or not you’re eligible, not the direness of an individual’s financial crisis.

In addition, unemployment insurance isn’t a permanent replacement for your regular income. The amount of money and duration for which you receive it are limited. If you have a side gig that’s making a bit of cash, you might need to report it and receive partial unemployment benefits.

Other Eligibility Considerations

Besides the requirements we’ve covered, you must be ready, able, and willing to work to qualify for unemployment insurance. In addition, you must make serious efforts to land a new job. It’s generally a good idea to document your applications and interviews as well as email, telephone, or other correspondence you’ve had with prospective employers.

Should You Pay Taxes On Unemployment?

As mentioned above, the IRS considers unemployment insurance as taxable income. That means if you lost your job and received unemployment benefits, you’ll be taxed at your ordinary income tax rate. At the end of the tax year, you’ll receive a form that shows the total amount of benefits you received.

What about the CARES Act?

On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under the $2.2 trillion stimulus package, Americans could receive an additional 13 weeks of unemployment benefits. The CARES Act also provided for an extra $600 weekly payout, which was also taxable.

How Much Tax Should You Pay On Unemployment?

The exact amount you’re supposed to pay in unemployment benefit taxes depends on the applicable state and federal tax rates. While the federal unemployment tax rate is 10%, the state component varies from 4-10%. In some states, you only have to pay federal unemployment tax.

How to Pay Unemployment Tax

Now that we’ve established who qualifies for unemployment insurance and that you should pay tax if you received benefits, let’s look into a few ways you can pay your taxes on unemployment. The first and most recommended option is to have the unemployment office automatically withhold the tax. This option works similar to when you receive a paycheck, and your employer takes out and remits your income tax. The option to have your taxes automatically withheld should be available when you first apply for unemployment benefits. You can also fill out a Form W-4V to switch to this option.

Another option is to make a quarterly unemployment tax payment. If you’re sure you can come up with a larger payment out of pocket, you can go with this option. Making quarterly payments can, however, become onerous. Not only should you calculate your state and federal tax obligations, but you should also make four payment deadlines during the year.

The last option is to wait until tax day to make a single income tax payment. However, if you received unemployment benefits for the maximum possible period, you may face penalties for not paying enough tax during the year. The bigger tax bill could also land you in a cash crunch.

What if You Can’t Pay Your Tax On Time?

You’ve done your math and have figured that you may simply not have enough money to cover your obligations come Tax Day — now what? It’s important to remember that you’re required to tax as you earn your income throughout the year. If you end up paying less than what’s due, you may have to pay penalties and a 3% interest. The government, however, offers several options if you can’t pay your taxes on time.

If you can’t cover your full tax bill on time, the IRS may agree to offer a short-term extension of up to 120 days. You must, however, still file your return on time. You may also still have to pay interest and penalties on the unpaid balance. Another option is to negotiate to pay in installments. However, keep in mind that fees, penalties, and interest may still apply. Whatever the case, it pays to be proactive and as transparent as possible with the tax office. Unless you get an interest-free loan, borrowing to pay your taxes generally isn’t your best option. The IRS interest is much lower than that of most loans and doesn’t affect your credit score.

The Bottom Line

Last year, many Americans ended up in an unenviable position where their day jobs and sources of regular income were cut abruptly. Some had to take unemployment benefits to cover the sudden loss of income while looking for more permanent solutions. On Tax Day, income from unemployment is subject to income tax. Whether or not you have money left over to cover your tax bill, you can take advantage of several payment options that the IRS offers.

This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.

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Sam Slabyk is a Digital Content Specialist. Sam loves to write about banking, budgeting, and tips on how to save money.

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