The current COVID-19 pandemic has led to a record number of workers filing for unemployment benefits, subject to federal and state income taxes. Workers who are collecting benefits for the first time may not be aware of tax implications, or they might opt against having taxes withheld from their benefit payments.
Note: This alert does not apply to the Economic Stimulus checks. Those direct payments are not taxable income because they are considered advance payments of a tax credit.
If you or your employees have collected unemployment benefits this year, please keep these items in mind:
- Failure to withhold enough tax during the year could result in smaller refunds or balances due to the IRS for 2020 tax returns.
- Unemployment compensation does not count as earned income for purposes of the earned income tax credit (EITC). This means some households might not receive a credit or receive a smaller credit than in past years.
- Those receiving unemployment benefits should perform a mid-year checkup of their income and taxes and then adjust their paycheck withholding as necessary. Learn more here.
- You may request that federal income taxes start to be withheld from your unemployment compensation by filling out a form W-4V and submitting it to your local unemployment office.
The IRS is expected to provide further communications to the public on the tax consequences of receiving unemployment benefits.
