UPDATE: April 15 Tax Day deadline and delay Q&A
July 15 is new 2020 tax filing and payment deadline

Unemployment helps after a job loss, but it's taxable income

Job-loss-fired

Unemployment claims are skyrocketing across the United States as more businesses close as a precaution to stem the spread of the coronavirus.

The latest on claims for unemployment benefits was released today by the U.S. Department of Labor. For the week ending on March 14, around 281,000 Americans filed first-time claims for the benefits. That's up 33 percent from the 211,000 benefits claims the week before. Percentage wise, the increase was among the largest one-week spikes on record.

Here in the Lone Star State, the Texas Workforce Commission reports that from March 8 to March 14 it received 16,038 unemployment insurance claims. That's a jump of about 38 percent compared to the same week in 2019.

While unemployment payments won't replace the wages you've lost, they can help tide you over somewhat as you seek another job.

Of course, because of COVID-19, most job searches and hiring are on hold now, too. One exception, at least here in Central Texas, are grocery stores. They looking for folks to help, especially in the shelf restocking area, as they deal with increased demand from panic-buying shoppers.

And sorry to be the bearer of more bad news, but unemployment benefits are taxable income.

Federal money, state administration: Unemployment benefits are a joint state-federal program that provides payments to eligible workers.

The money comes from the Federal Unemployment Tax Act, or FUTA, payments that most employers pay to both the U.S. and their state governments. FUTA payments are for each worker on payroll, but in this case, only the employer pays FUTA tax. It is not deducted from employees' wages.

Each state administers its own separate unemployment insurance program. That means there are resulting in 53 different unemployment compensation programs operated in the states, the District of Columbia, Puerto Rico and the Virgin Islands.

Qualifying for unemployment: All of the programs follow the same guidelines established by federal law, including work and wage requirements. Out-of-work applicants also must meet any additional prerequisites established by their states.

The main requirement to get unemployment benefits is that you lost your job through no fault of your own. Job losses that usually qualify for unemployment benefits include being are laid off, losing your job in a reduction-in-force (RIF) or your company's downsizing due to economic reasons.

Typically, you cannot get unemployment if you quit simply because you didn't like the workplace (or your boss) or left to move with your spouse. However, at least here in Texas, you might be able to get unemployment if you had a good reason for quitting, either related to your job or a medical condition.

Unemployment payments also aren't provided when you're fired for work-related misconduct. This includes, again here in Texas, dismissal for disregarding company policy, violating the law or failing to perform your job.

And unemployment benefits generally are not available to the self-employed.

The Labor Department has a directory of state unemployment insurance offices, with address, phone numbers and webpage links.

You also can find details on your state's unemployment benefits requirements and application process at the CareerOneStop.org interactive map. It's there, just scroll down below the coronavirus info at the top of the page.

Pandemic's effect on unemployment: The spread of COVID-19 obviously has forced more folks to look into filing for unemployment.

To help meet these new and increasing applications, the recently enacted federal Coronavirus Response Act gives states more flexibility (and money) to address COVID-19 through expanded benefit eligibility.

For example, states now can pay unemployment benefits where:

  • An employer temporarily ceases operations due to COVID-19, preventing employees from coming to work;
  • An individual is quarantined with the expectation of returning to work after the quarantine is over; and
  • An individual leaves employment due to a risk of exposure or infection or to care for a family member.

The National Association of State Workforce Agencies is tracking how state unemployment insurance agencies are dealing with COVID-19 workforce issues.

It's taxable income: As noted, unemployment benefits are not enough to make up for your lost wages. They are, however, enough for the Internal Revenue Service to collect taxes.

Don't blame the IRS. It's the law.

And I know what you're thinking. Taxing unemployment benefits doesn't seem quite fair

But as fatalists says, it is what it is. And here's how you deal with it.

Reporting unemployment: Since the unemployment benefits are taxable, you report them on your annual tax return.

Don't ignore this tax task. Since government agencies are involved, they're sharing information.

The IRS will get a copy of the Form 1099-G, Certain Government Payments, that you'll receive. And all your unemployment earnings are clearly noted in Box 1 of that form.

Enter that amount on line 7, which notes it's for unemployment compensation, of Form 1040 Schedule 1.

Unemployment withholding or estimated taxes: There are a couple of ways you can deal with the taxes due on your unemployment benefits.

When you start getting them, you then can make estimated tax payments.

Or you have the option when you apply for unemployment to have taxes withheld from the benefits before you receive them. This process is similar to regular payroll withholding.

In the case of unemployment, you'll need to fill out the federal Form W-4V, Voluntary Withholding Request, or a similar IRS-acceptable document that the paying agency has created.

By submitting this form or substitute document, income taxes will be withheld at the rate you choose. You can select the percentage — 7%, 10%, 12% or 22% — you want taken from each unemployment payment.

Those withheld amounts then will show up on your Form 1099-G, with the total federal tax withheld shown in Box 4 and your state withholding amount in Box 11.

Your federal amount will go on line 17 of your 1040 along with any other withholding, like from the paychecks you got before being laid off.

Your state tax return will have a similar reporting requirement. Check that form.

Hang on and hang in there: I know, neither paying estimated taxes nor reducing your unemployment benefits by withholding is appealing. You're already taking an income hit, so you need all the money you can get to cover your living expenses.

But if you don't pay tax on unemployment by either of these ways, you could face a tax bill, and possible underpayment penalties, when you eventually file your tax return.

I hope you're able to get some unemployment assistance. Mostly, though, I hope your coronavirus closed workplace reopens soon so you can get back to your job.

 

Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.

But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.

 

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