The coronavirus pandemic has turned American employment upside down. While some may be proclaiming recent amazing job growth in our country, the overall numbers of people unemployed is still staggering.
According to the federal government Bureau of Labor Statistics, numbers are huge.
To help people suddenly unemployed, the government temporarily passed enhanced benefits that meant people could get additional benefits up to $600 a week. As I write this those benefits have come to an end.
People who apply for unemployment benefits are doing so after the loss of a job. Money may be tight, and it might not be enough to maintain expenses from before the job loss.
The Unemployment Withholding Question That Can Hurt
When applying for unemployment one of the questions people may be asked is if you want to elect to have federal and or state taxes NOT withheld from the benefits.
Facing financial panic, the typical kneejerk reaction to this question is to skip having those taxes withheld.
We are all generally hopeful that things will get better and we will be back employed again soon. So opting out of having taxes withheld seems the reasonable and temporary solution to making ends meet.
But opting out of having those taxes withheld does not mean you won’t owe them. You will. Skipping the withholding just puts more money into your unemployment check when times are tough but can create nasty tax surprises later.
Let’s look at one state as an example. Maryland says:
“Any unemployment insurance benefits that you receive must be reported as part of your gross income for both state and federal tax purposes.
- You may elect to have taxes deducted from your benefit payments.
- You may choose to have federal tax (10%), Maryland state tax (7%), both or neither deducted from your payment.” – Source
The IRS will receive a 1099-G showing the amount of unemployment you received.
Pandemic Unemployment Benefits Cut by $200 a Week or More
President Trump just signed an executive order to continue enhanced unemployment benefits but at $400 per week instead of the previous $600. But before you get too excited about the $400 per week, it comes with fine print that can change everything.
Individual states must request the new benefits that replace the $600 payments. But the states have to put up $100 of the $400 benefit if they can even afford to. But if states want to take advantage of these potential extended benefits the Governor will have to request them from the FEMA Administrator.
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Not a Single Good Answer for Taxes and Unemployment Benefits
There is no good answer here for people facing a financial crisis and needing every single dollar to try to stay afloat.
If your state has guides online to provide instructions on if taxes will be withheld or you elect to opt-out, just be prepared for a future tax surprise.
The individual facts may be different from state to state and to get some clarity here on your specific situation you will need to investigate your tax exposure in your state. For example, not all states have a state income tax, or not all states were able to deduct taxes from the Federal Pandemic Unemployment Compensation that created the $600 checks.
Even if your state does not have an income tax, everyone will still have to pay ordinary income tax on the unemployment benefits unless your income precludes you from paying when you file your 2020 federal tax return.
If there is one potential bright spot it might be that before you lost your job you were having appropriate taxes withheld from your paychecks at your higher income rate. Now that you are unemployed and earning less you might be entitled to a tax refund from overpaying if you count your higher and now lower income.
Here is the bottom line – don’t assume you will not owe income tax on the unemployment benefits you have or will receive.
You may be eligible for public benefits you don’t even know about in your time of despair. The website Benefits.gov is a good place to look to see what you may be eligible for.