tax tips — May 07, 2020

Taxes for Unemployment Insurance

by Susannah McQuitty

man reading about unemployment benefits and taxes


The Coronavirus pandemic and related social restrictions have caused millions of layoffs and made work difficult or even impossible to find. According to the Department of Labor, 4.4 million Americans filed for unemployment insurance last week—and while that number is down from the previous week, it’s clear that loss of steady work has affected a huge number of taxpayers.

Here’s what you need to know about how unemployment insurance works in light of the COVID-19 pandemic and how it affects your taxes.

What’s different for unemployment because of the Coronavirus?

When it comes to applying for unemployment insurance, not much has changed. Each state is responsible for handling unemployment insurance, so you would apply for the benefits in the state where you worked.

What has changed is how much you receive per week and who qualifies for the benefits. The CARES Act implemented a three-part unemployment insurance plan for all American taxpayers who find themselves without a job during the COVID-19 pandemic.

Since there are three parts to this new approach, let’s go over the basics of the CARES Act unemployment relief.

Unemployment recipients get an extra $600 per week

The Federal Pandemic Unemployment Compensation (FPUC) is the first part to be implemented, and it provides an additional $600 in weekly unemployment insurance benefits to recipients. That’s an extra $600 on top of your state’s regular distribution, and you’ll receive that amount even if it is greater than what you earned in your previous job.

Freelancers and independent contractors now qualify too

Second, we have Pandemic Unemployment Assistance (PUA), which makes unemployment benefits available for self-employed people like freelancers and independent contractors. Before the CARES Act, only employees qualified—and while the amount of the benefit may differ from state to state, self-employed taxpayers can now qualify for unemployment benefits.

Benefits will still be provided up to 13 weeks after a state’s budget for relief runs out

So what happens when states start running out of money? The CARES Act provides for that too—the Pandemic Emergency Unemployment Compensation (PEUC) ensures up to 13 additional weeks of benefits for those who have exhausted their state unemployment benefits. This part of the CARES Act doesn’t have a definitive timeline, though, so keep an eye on our Coronavirus updates page for more info as it arrives.

Is unemployment insurance considered income?

Now, here’s the kicker: Unemployment payouts are considered taxable income, so be prepared for that next year. The good news is that you won’t have Social Security or Medicare taxes deducted, but you will still owe federal income taxes.

Federal income tax will be withheld at a 10% rate if you use Form W-4V, Voluntary Withholding Request, but that doesn’t guarantee that your entire taxes owed will be covered and you can’t change the amount withheld. Depending on your situation, you may owe more than that at the end of the year, so be sure to set aside part of that money just in case.

You can choose not to have any tax withheld from your unemployment benefits, in which case you would need to pay quarterly estimated tax payments—and if you pay more than enough with those, you could ensure that you receive a refund next year.

Does my stimulus check count as unemployment benefits?

No—your stimulus check is treated like an advance refund for next year, and it’s not considered income at all (which means you won’t be taxed on it, unlike unemployment benefits).

Want to stay informed?

We’re keeping our readers up-to-date with our Coronavirus update and information content, so be sure to check that out for all the latest news. Stay safe and healthy!

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