The resulting economic fallout from the COVID-19 pandemic has caused millions of Americans to find themselves out of work through no fault of there own. Several economic stimulus packages have helped out, and it looks like another is on the way, but one thing to keep in mind is that many of the boosts to unemployment are still taxable at both the state and federal level. out of work.
While the federal funds given to most people working or not are not subject to taxation, the essential unemployment benefits are.
Why is unemployment taxable?
If you’re collecting unemployment, the IRS considers it income, just like it would money earned from a job, and you’ll need to account for it when you file your taxes for 2020. While some states, including California, don’t tax unemployment benefits, Oregon and Washington both do
If you received unemployment insurance this year, you’ll receive a Form 1099-G, which shows how much money you received from unemployment benefits.
How to avoid a large tax bill
There are a few options for paying your unemployment taxes:
- Paying when you file your 2020 taxes
- Make estimated quarterly tax payments.
- Have your taxes automatically withheld.
Most of us need every dollar of unemployment insurance, but if you can make it work, the easiest option is to have taxes automatically withheld, just like you would from a normal paycheck
The trickiest one is making estimated quarterly payments. Many sole proprietors, freelancers, or others who get all or some of their income from 1099 jobs make estimated quarterly tax payments. This helps spread out the payment, but you could be off in your estimation and pay too little, or not maximize the amount you have to live on.
Whatever you decide, we know this is tough on everybody. While we can’t give tax advice, we are happy to help you develop a budget. You can use many of online tools, like Money Management as well.