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Many taxpayers don’t realize that unemployment compensation is taxable

Posted on September 2, 2020

With so many Americans receiving unemployment compensation for the first time, the CPAs at Teipen CPA Group, P.C. want to make sure those receiving unemployment pay know that taxes are due on unemployment income.

As harsh as it may sound, by law, unemployment compensation is taxable and must be reported on your 2020 federal income tax return. Taxable benefits include all special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted this spring.

If you are receiving unemployment compensation, you can have tax withheld from your unemployment benefit checks now to help avoid owing taxes on this income when you file federal income tax returns next year.

Withholding is voluntary, of course. Federal law allows any recipient to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability.

Here’s how to set this withholding request in motion:

Go to IRS.gov and fill out Form W-4V, Voluntary Withholding Request. Once filled out, you should provide it to the agency (your state) paying the benefits. Do not send the completed form to the IRS.

If you do not choose this withholding option or if the amount of your withholding request is not enough, you also have the choice to make quarterly estimated tax payments. Since the payment for the first two quarters of tax year 2020 was due on July 15, you can utilize this option for the third and fourth quarters, due on Sept. 15, 2020, and Jan. 15, 2021, respectively.

Here are some additional types of income payments you may want to check your withholding on:

  • Benefits paid by a state from the Federal Unemployment Trust Fund
  • Railroad unemployment compensation benefits
  • Disability benefits paid as a substitute for unemployment compensation
  • Trade readjustment allowances under the Trade Act of 1974
  • Unemployment assistance under the Disaster Relief and Emergency Assistance Act of 1974, and
  • Unemployment assistance under the Airline Deregulation Act of 1978 Program

Not sure you are having enough income withheld? Feel free to check in with our CPAs, or use the IRS Tax Withholding Estimator available on IRS.gov to make sure. For more information, including worksheets, see Form 1040-ES and Publication 505, both also available on IRS.gov.