Due to the Coronavirus pandemic, millions of Americans have received unemployment compensation. For many workers, this may be the first time they’ve qualified for unemployment benefits.
Like the wages you earn, unemployment compensation is taxable and must be reported on your tax return for the year in which you receive it.
The catch with receiving benefits is that tax withholding on unemployment benefits is voluntary. Therefore, when you receive your weekly benefit, taxes may not be coming out.
As a recipient you can request that a flat 10% be withheld from your benefits to cover your tax liability. The request can be made directly with the agency paying your benefits by using Form W-4V, Voluntary Withholding Request or another form offered by the agency.
If you did not have tax withheld or did not have enough tax withheld from your unemployment compensation then you can pay quarterly estimated tax payments. Third quarter payments are due September 15th. Fourth quarter payments are due January 15, 2021.
To avoid penalties, pay the taxes that you owe overtime, instead of waiting until you file your tax return.
Come 2021 you’ll need to report your unemployment compensation on your tax return. You’ll receive Form 1099-G, Certain Government Payments in January with the dollar amount of your benefits in box 1.
Be aware that with unemployment compensation, your 2020 tax return will likely look a little different than it would in a normal year.