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Unemployment benefits are taxable income

| Jul 29, 2020 | Federal And State Tax Collections |

Are you one of the millions of Americans who has been collecting unemployment benefits? If so, you should keep in mind that these benefits are considered to be taxable income. Understanding this fact now can help you avoid an unpleasant surprise in 2021.

Steps you can take to avoid a hefty tax bill

Most employers take taxes out of their employee’s paychecks. This is convenient because you don’t have to track your income and determine what you may need to pay the IRS every year. However, taxes are not automatically taken out of unemployment benefits. This means you’re likely to receive a hefty tax bill from the IRS next year.

There are a couple of steps you can take to avoid having to pay a lump sum in 2021. One option is to have your taxes withheld from your unemployment payments. This is akin to having taxes withheld from your paycheck. However, you have to make this request.

Another option is to make quarterly payments to the IRS. Doing so will require a little more work on your part. You will be responsible for calculating your anticipated payments. You will also be responsible for delivering your payments.

Of course, you can always opt to do nothing and wait to see what you owe the IRS next year. However, doing so can be risky if you don’t have the income on hand to make this lump payment.

One spot of good news is that Medicare and Social Security benefits are not taxable. If you run into any trouble with the IRS, it’s always best to discuss your options with a skilled tax law professional.