The global pandemic that has hit the United States extremely hard has produced some of the highest unemployment rates in history. As a result of this, a record number of individuals have been receiving unemployment benefits. While these benefits are extremely helpful in a time like this, many recipients do not know that unemployment benefits are subject to federal and state taxes in most parts of the country. 

As more and more new applicants claim these benefits, many are unaware of this. If you are unaware of this or opt-out of having taxes withheld from your payments, you may receive a lower refund or owe money when 2020 taxes come due to the IRS. 

Taxes

When you apply for unemployment benefits, you have to the options to have 10% withheld for federal taxes from each payment. A lot of recipients of unemployment benefits do not know how to sign up for the withholding or think these benefits are not taxable. Additionally, a recipient of this benefit may opt-out of having a portion withheld as they need as much money as possible. 

While you do have to pay federal taxes on the benefits since they are considered wage income, you will not have to pay payroll taxes. Also, if you live in Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia, or if your state doesn’t tax wage income, then your state does not tax your unemployment benefits. 

The taxes on unemployment benefits is completely different than the stimulus checks the government sent out. The stimulus checks are not taxable since they are considered advanced payments of tax credits. 

If you are a recipient of unemployment benefits, right now would be a great time for a mid-year check up on your income and taxes. This check-up allows you to get an understanding of where you are and see if you need to start withholding or increase your withholdings. With this check-in, this puts you back in control of your finances.