There are almost 40 million Americans newly filing for unemployment benefits and this is raising questions as people across the country deal with financial uncertainty.
Unemployment benefit and taxes
This is the seventh consecutive week that we have seen a decline in the number of claims being made but the total number of people unemployed us now over 17% of the working population. And as millions of people who have never claimed before file for unemployment benefits, many are uncertain about exactly what it entails.
The first thing to be clear about it that this is not ‘free money’ being handed out by President Trump’s administration. By understanding this you can avoid a painful 2021 when tax bills are revised to take account of what has happened through this period.
There are nearly 40 million Americans newly filing for unemployment benefits and this is raising questions as people across the country deal with financial uncertainty.
Thursday saw the latest unemployment figures released in the United States. A further 2.4 million Americans filed a jobless claim in the week ending 16 May taking the total of first time applications to a massive 38.6 million. With payments being sent out to millions of households struggling to cope financially through the coronavirus crisis, some are asking whether or not they will have to pay taxes on their benefits.
As has been well documented, the $2 trillion CARES Act was signed into law, which increased unemployment benefit by $600 per week, and other forms of assistance like Pandemic Unemployment Assistance (PUA) were also introduced to reach many workers who were not normally eligible.
Unlike the stimulus check, however, these benefits are taxable and although social security and Medicare taxes are waived when unemployed, federal income tax and some state taxes are still to be paid. (See below for state variations)
You have a choice whether you withhold taxes from your weekly benefit through your state’s unemployment agency, you pay estimated taxes quarterly, or you wait until the point at which you file your return. A ‘Form 1099-G’ will be provided and this will show the amount of unemployment compensation you received for the year as well as any income tax withheld.
Demonstrators attend a Re-Open New York Rally in Commack, Long Island, New York, USA
Your financial position will determine when you decide to pay the taxes owed, and consideration must be made over whether it works better to have it taken weekly, in small amounts, or as a large bill at a later date. The latter may cause some pain when it comes but could also be when you have returned your income to where it should be and can be managed appropriately.
States waiving income tax on unemployment checks
Your benefits are tax exempt in California, Pennsylvania, New Jersey, Montana, Oregon and Virginia. There are other variations across the country and to check for yours please see the Tax Foundation’s guide.
Although some businesses are slowly starting to return, concerns remain that many of those whose jobs were ‘put on hold’ may actually become permanently lost jobs. A second stimulus payment is in the offing, with the HEROES Act set to be voted on by the Senate following Memorial Day.