Unemployment Benefits Can Amount to A Large Tax Bill
As the coronavirus led to the shutdown of the U.S. economy, millions of Americans suffered financially from the pandemic. Around 36.5 million American adults have filed for unemployment benefits in the last two months, these individuals could face a large tax bill from these benefits, according to USA Today.
The CARES Act allowed millions of unemployed workers to collect an additional $600 per week through the end of July for unemployment benefits. The unemployment benefits could amount to almost $10,000 per person.
While stimulus checks are tax free, unemployment benefits are subject to federal taxes and potentially state and local taxes depending on the state.
For states such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, there are no state income taxes. For other states like California and New Jersey, income taxes exist but the unemployment benefits are made an exception.
There are three options for paying the taxes, to have the amount withheld from each check, to pay the taxes quarterly, or to pay the entire tax bill when filing the tax return.
Having money withheld in each check means avoiding a hefty tax bill when tax return is due, but it also means less money in possession right now. Paying quarterly is a middle ground between the other two approaches, but the process can be a little more complicated and requires estimation of the duration and amount of the unemployment benefits a person receives.