After the COVID-19 pandemic swept the nation, many were left without jobs or income. In March 2020 alone, about 10 million Americans applied for unemployment, the Washington Post reported.
For those who turned to unemployment benefits last year, with tax season upon us, you might be wondering how it’s all going to shake out when it comes to filing your income taxes.
Though the rules can vary in each state, for most, residents can qualify for unemployment if you became unemployed through no fault of your own.
But here’s the thing: You still have to pay federal taxes on said unemployment benefits.
How much you get taxed all depends on where you fall in the tax bracket (see below).
|Tax Rate||Taxable Income (Single Filer)||Taxable Income (Married, Filing Jointly)||Taxable Income (Married, Filing Separately)||Taxable Income (Head of Household)|
|10%||$0 to $9,875||$0 to $19,750||$0 to $9,875||$0 to $14,100|
|12%||$9,876 to $40,125||$19,751 to $80,250||$9,876 to $40,125||$14,101 to $53,700|
|22%||$40,126 to $85,525||$80,251 to $171,050||$40,126 to $85,525||$53,701 to $85,500|
|24%||$85,526 to $163,300||$171,051 to $326,600||$85,526 to $163,300||$85,501 to $163,300|
|32%||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350||$163,301 to $207,350|
|35%||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $311,025||$207,351 to $518,400|
|37%||$518,401 or more||$622,051 or more||$311,026 or more||$518,401 or more|
Here are three ways to handle taxes on unemployment benefits:
Dave Ramsey, a personal finance adviser, radio show host, author and businessman, says the best thing you can do when you first sign up for unemployment is to choose to have 10% of each payment held to cover some of or everything you owe in federal income taxes. It ensures you won’t have that burden later, giving you a head start when tax season approaches.
2. Pay quarterly
If you didn’t have your taxes withheld, another option is to send quarterly estimated taxes on that money to the IRS.
When quarterly taxes are due:
|When you get paid||Tax due date|
|Jan. 1–March 31||April 15|
|April 1–May 31||June 15|
|June 1–Aug. 31||Sept. 15|
|Sept. 1–Dec. 31||Jan. 15 (the following year)|
Click or tap here to learn how to estimate what you’ll owe quarterly.
But know this going into the upcoming tax season: If you haven’t filed quarterly up to this point, and you didn’t have it withheld, you will have to pay it all by April 15.
3. Pay it all when tax season gets here.
Ramsey doesn’t recommend this route. It can be costly, and you might even be slapped with a penalty for not paying estimated taxes if they’ve piled up. If you’re still receiving unemployment, or might be in the near future, consider your other options, as it will not be as hard a hit.
Ramsey said if you’re left with paying a huge chunk to the IRS this season, try meeting with a tax adviser who can help you out.
“Nothing takes the stress out of Tax Day like having a tax adviser in your corner who eats, sleeps and breathes all this tax stuff on a daily basis,” he said.