February 23, 2021

Category: Tax Advice

Receiving Unemployment May Change How Much You Own in Taxes


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.

 

In 2020, millions of people found themselves filing for unemployment due to hardships resulting from the coronavirus pandemic. Unemployment beneficiaries who received benefits under the CARES Act typically received compensation weekly, earning on average $300 to $400 per week. In 2021, many Americans are still relying on unemployment benefits to stay afloat financially.

 

Recently, the IRS provided a reminder that unemployment income is considered taxable.1 This means that if you did not opt to have a portion of your benefits withheld, you may receive a smaller tax refund or end up owing taxes when you file this year, depending on your particular situation.

 

If you haven’t accounted for taxes when you received unemployment, don’t worry. Below, we’ve provided a few ways that you can get ahead of your 2021 taxes.


Do You Pay Taxes on Unemployment Benefits?

 

If you received unemployment income, you’ll have to pay federal income taxes on the income and, for some states, state income taxes. This useful guide from CreditKarma offers insights on what to expect when it comes to paying taxes on your unemployment benefits and things to keep in mind.2

 

Fortunately, there are actions you can take to help prevent any unexpected tax surprises next April for unemployment benefits received in 2021. You can choose to withhold taxes from your unemployment benefits or make quarterly estimated tax payments directly to the IRS.  The amount withheld or paid quarterly to the IRS may not cover your full tax liability but doing either is likely to put you in a better position come next April. Also, don’t forget to look into the earned income tax credit (EITC), both for your 2020 tax return and your 2021 tax return.  Unemployment benefits are specifically excluded from earned income when determining whether you qualify for the EITC, but if you worked or had other taxable earned income during the year, you may still be eligible for the EITC.


Start Withholding Taxes Now

 

Don’t want any surprises on your tax bill? Consider having taxes withheld from your unemployment check. You can have a flat 10% withheld from your unemployment benefits by filling out a Form W-4V. If you’re unsure how much the 10% withholding will affect how much you’ll owe in taxes, you can use the IRS tax withholding estimator.

 

Make Quarterly Tax Payments in 2021

 

If you don’t want to withhold your taxes from your benefits check, you have an alternative solution to try and limit your tax liability next April. You can choose to make quarterly estimated tax payments. This means that you’ll make four tax payments during 2021, once every three months, to the IRS (and your state, if needed).  In 2021, quarterly tax payments are due on the following dates: 3


  • First payment: April 15, 2021
  • Second payment: June 15, 2021
  • Third payment: September 15, 2021
  • Fourth payment: January 15, 2022

 

To make quarterly estimated tax payments, you’ll need to make sure to stick to the tax payment deadlines. You can send in your tax payments by mail through Form 1040-ES or online. However, if you don’t want to pay a transaction fee for submitting your payment online, consider mailing in a check. For more information, including some helpful worksheets, see Form 1040-ES and Publication 505, available on IRS.gov.

 

Learn more about making quarterly tax payments as an individual taxpayer here.


Consider the Earned Income Tax Credit

 

The EITC is intended for low-income individuals and families with the amount of the EITC depending on the number of qualifying children. The EITC for the 2021 tax year ranges from $543 for filers with no qualifying children to $6,728 for filers with three or more qualifying children. The 2021 tax year income limit for the EITC is $15,980 for single tax filers and $21,920 for joint married filers, each with no qualifying children.4 The limit increases based on the number of qualifying children max out at $51,464 for single filers and $57,414 for joint married filers, each with 3 or more qualifying children.  As noted above, unemployment benefits alone will not qualify for the EITC, but it’s something to consider if you have taxable earned income.

 

Learn more about types of earned income and what does not qualify as earned income here.

 

 

Conclusion

 

If you’re worried about have a big tax bill next April for your unemployment benefits, there is still time to get ahead. One of the best ways to avoid paying a hefty tax bill is by withholding taxes from your unemployment checks, which can be done entirely online (for a fee),or making quarterly estimated tax payments.

 

 

Sources:

  1. https://www.irs.gov/taxtopics/tc418
  2. https://www.creditkarma.com/tax/i/unemployed-tax-tips
  3. https://www.bankrate.com/taxes/when-are-taxes-due/
  4. https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables

 

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