Although the U.S. economy added 1.8 million jobs in July, the country is suffering, with the unemployment rate in the double-digits. If you’re one of the estimated 30 million Americans collecting unemployment benefits right now, you may be eager for updates on the latest round of stimulus negotiations—but tax experts say you should be aware of another looming issue.
If you’re collecting unemployment benefits, you may not realize you have to pay federal and state taxes on that income. (And the same goes for any severance pay you may have received from your former employer.) According to a recent survey from Credit Karma, 27% of unemployed Americans don’t think their benefits are subject to tax.
Another common scenario: The Hill reports some folks have opted out of tax withholdings because they need the money from a larger unemployment check right now. And even if you made an election to withhold taxes when you filed for unemployment benefits, experts warn the deductions may not be enough to cover your taxes owed. This could lead to a smaller tax refund come next April—or worse, an unexpected tax bill.
How to pay taxes on unemployment benefits
If you’re receiving unemployment benefits and aren’t withholding taxes, don’t panic. There are a few ways you can fix the problem—and potentially avoid a tax bomb next spring.
G/O Media may get a commission
Start by contacting your local unemployment office. You can fill out Form W-4V—the Voluntary Withholding Request—and submit it to your local office. This will allow you to start withholding federal taxes and state taxes (if needed). Depending on the local rules, it may also be possible to make the change on a biweekly basis when you recertify to receive your benefits. The flat rate for your federal tax withholding is 10%.
You may also make quarterly estimated tax payments online through the Electronic Federal Tax Payment System. You can learn more about the process—including how to calculate a payment amount—here. The final option is to set money aside so you have it at the ready to pay the bill next year. You can use the IRS’ free Tax Withholding Tool to figure out how much you need to save.
