Do I Need to Pay Taxes on Unemployment?

If you were a recipient of income tax benefits for unemployment in the year 2021, then you might be wondering whether you need to pay tax on the amount you earned. The simple answer is yes.

This is a significant difference from the previous year, when you had to file the tax return for your 2021 year for 2020 income. For federal tax returns for 2020 the American Rescue Plan of 2021 allowed for an exemption of up to $10,000,200 for each individual, however, the tax break was not extended to 2021.

When the April 15 deadline to file your income tax returns approaches You must be ready to pay federal tax on the unemployment benefits you earned in 2021. It’s possible to get a bit of surprise tax bills. Here’s the information you need to know.

How Unemployment Benefits Can Be Taxed

Benefits from unemployment are treated as regular income. Benefits are filed with the IRS and are subject to federal taxation on income. The amount you receive in the course of the year is added to your total taxable income. Even though the benefits aren’t taxed (nothing is taxed unless you decide to) It’s the sum of your income which affects the tax burden.

The majority of states that have state income taxes also tax unemployment benefits however, some states do not. Take a look at the table at close of the article find out the state that taxes unemployment benefit and the tax rate is. Find more information on the different states’ policies to unemployment benefits in this article.

The major difference between regular and unemployment wage earnings is that you pay no Social Security or Medicare taxes on unemployment benefits (listed as FICA taxes). Additionally, the amount that you pay on the benefits you receive is determined by how much income your bracket has. If, for instance, you’re a single-filer and you earn between $9,951 and $45,525 and you’re within the tax bracket of 12% for the Federal tax bracket for 2021-2022.

How to Pay Taxes if you’re Still unemployed

There’s a chance you’re suffering financial hardship even if you’re not working. If you’re unable to pay for your tax bill then the IRS provides a variety of alternatives.

In the first instance, first, contact first, contact the IRS immediately to discuss your situation and determine whether you’re eligible for an alternative plan of payment. They’ll be able to talk to you about your choices and then set you up with an installment plan that includes the short-term plan that allows for repayment within 90 days, or even a lengthy installment plan for 72 months. Tax season is in full swing this year, and it might not be straightforward to complete the process in a hurry. Be patient.

If you’re unable pay any amount then the IRS could decide that your account ” currently not collectible.” This declaration temporarily delays the collection process.

Be aware that your tax debt won’t simply disappear. The penalties and interest could be accrued on the amount that is not paid during the “not collection” timeframe. Also, you’ll have to pay for interest and fees on the installment plan you choose to use. If you are able to afford just a bit towards the tax bill for next year, it’s recommended to avoid paying an all-in-one payment in April.

How to avoid a hefty Tax Charge on unemployment benefits

To avoid having to pay an enormous tax bill at the time for tax filing, you could decide to withhold some of your unemployment benefits to ensure that you don’t end up with the tax bill, or lose your refund that you had hoped for.

If you are unable to pay for the entire year, it’s strongly recommended that you consider withholding a set amount. The organization which pays your unemployment benefits will withhold a set amount of 10% to pay for the entirety or a portion of your tax liability.

When you return to work, it’s worthwhile checking that you have the right amount withheld in order in order to avoid having a surprise bill. Make use of this IRS tax calculator to determine the amount you must withhold.

What else do you need to know about Unemployment Tax Withholding

While the IRS recommends that you deduct some amount of your unemployment benefits to pay taxes, your health is your primary concern. Of of course, avoiding a huge tax bill is better however, if you’re restricted, it’s more crucial to pay off your utility bills and ensure that you have food on hand. There’s always ways to pay off your debt to the IRS in the future. Better than letting your fridge be empty.

Are you unemployed? Check out our unemployment resources. We’re here to help. If you’re returning to work, but are facing an enormous tax bill due to your absence from work, speak to one of our MMI credit counselor. We might be able to assist you in tackling the other debts you have and add some financial balance in your financial plan.

Diagram: States that tax your unemployment benefits