Check Your Paperwork: Unemployment Payments Aren’t Tax Exempt

When Virginia residents file for unemployment, they need to be sure federal taxes get taken out.

MARTINSVILLE – More than 36 million Americans filed for unemployment benefits this year due to COVID-19. Unfortunately, unless you checked one little box when filing, you’ll end up owing part of that to the federal government.

The Internal Revenue Service views funds granted to the unemployed just like any other checks given out. They’re taxable. And you’d better believe they’re going to tax them.

When filling out an unemployment application, people can withhold federal taxes from the funds or get the full benefit. At the time, it seems like a simple choice. If you’re unemployed, you need money. Why wouldn’t you get the most money available in your check? Because later, that decision could come back to hurt you in a major way.

Unemployment causes some confusion

Ruth Easley, Commissioner of Revenue in Martinsville, expressed that the question about withholding taxes confuses some applicants.

“I’m not sure if people actually understood that at the time they signed up for it,” Easley said. “I had a question that came up about that and I’m like, ‘Yes you want to go ahead and have taxes taken out because if you don’t, you’re going to have to make up for it later on.’ If you don’t take it in the beginning, you’re better off.”

Now let’s be clear what’s taxable. If you lost your job at any point this year and applied for unemployment, that weekly check counts as income. Also, if you applied between March and July, you received an extra $600 a week through the Coronavirus Aid, Relief and Economic Security (CARES) Act. That extra portion ended on July 31, but it is taxable too.

For the filing week ending on September 12, the number of unemployed in Virginia totaled 201,616, according to the Virginia Employment Commission. That was a 7.3% decrease from the previous week. Unfortunately, it was 183,773 higher than the 17,843 continued claims from the comparable week last year. The state unemployment rate also declined by 50% from the May 16 filing week peak of 403,557 claims.

That means hundreds of thousands of Virginians might need to double-check their paperwork.

There’s still time

People can still make changes in compliance with proper withholding. However, it’s not quite as simple as setting aside a blanket percentage of their benefits. There’s a little math involved.

“It’s going to depend on what your other income is and how you’re impacted,” Easley said. “It’s not a one-size-fits-all.”

Other income-based projects might change a person’s tax withholding amounts. Examples include independent contractor jobs like freelance writing opportunities, hosting photography sessions and providing cleaning services. Just because someone lost their full-time job to COVID-19 doesn’t mean their side business will be exempt from taxation.

Another withholding option is the quarterly tax method. That’s when people estimate their taxes for the year and make four equal payments to the United States Treasury.

“There is the option to make up for it,” Easley said.

Otherwise, instead of receiving a tax refund, some households could get a letter in the mail stating that they owe the IRS money.

“As long as you have paid 90% of what you owed in the prior year by January 15, 2021, you should be okay. The problem will be if you did not have withholding on your unemployment compensation and you owed money this past year; rather than getting a refund, you may owe more to the federal government in 2021 than you did in 2020,” Easley said. “The best thing to do is use the calculator provided by the IRS website and try to get ahead of it before the end of the year. The upside is, on the Virginia return unemployment, compensation is not taxable income. It may be in other states, though.”

Help is here

For those with general questions about tax withholdings, Easley encouraged contacting their local Commissioner of Revenue’s office. For more detailed inquiries, reaching out to a professional tax preparer might be the best option.

At the start of each year, resources appear across the commonwealth for individuals who need to file their taxes. Some specifically assist those with income restrictions. Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites prepare taxes for free. They’re usually located at community and neighborhood centers, libraries, schools, shopping malls and other easily accessible locations.

“At the end of the day, it’s really going to depend on what your individual tax circumstance is, as to how you’re going to be impacted by it,” Easley said. “But yeah, there is a big possibility that there’s going to be a surprise at tax time because the income from unemployment is considered income.”