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6 unemployment tax Q&A for COVID-tinged Labor Day 2021

Updated, Labor Day Monday, Sept. 6, 2021: It's 2021 and we're still dealing with COVID-19. That means many people also still are dealing with losing their jobs. The updated taxes and unemployment insurance questions and answers — yes, the $10,200 exemption situation is noted — in this post from this time last year still apply.

Job seeker got work sign

It's Labor Day weekend. This holiday usually is time for end-of-summer revelry, with a little leftover celebration of the workers whose efforts are recognized on the first Monday of each September.

This year's a bit different. Social distancing during the coronavirus pandemic have, for the most part, limited the usual three-day weekend parties.

As for the workers, COVID-19 also means more attention is paid this year on those who aren't laboring because they lost their jobs.

COVID-19 response work ramifications:Health decisions by states, several of which reacted to the novel coronavirus earlier than Uncle Sam, led to widespread business closures as a way to slow infections.

That led to layoffs. Lots and lots of layoffs.

Some workers were rehired once the pandemic conditions in their areas improved somewhat.

However, millions of Americans have at some point this year relied on unemployment benefits. That includes for the first time ever some self-employed workers, who qualified for the government assistance under a provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Improving work outlook, but not for all: The Department of Labor's (DoL) pre-Labor Day data provided a tiny bit of good news for the country's overall workforce.

For the week ending Aug. 29, DoL reports seasonally adjusted initial claims for unemployment benefits were 881,000. That was a decrease of 130,000 from the previous week's out-of-work tally.

The seasonally adjusted unemployment rate also dropped a tad, according to the DoL. The 9.1 percent jobless rate for the week ending Aug. 22 was a decrease of 0.8 percentage point from the previous week's rate.

But the improved, albeit slightly, unemployment figures are of little consolation if you're out of a job. And millions are or have been out of work during 2020.

Millions out of work at some point this year: The Sept. 3 DoL announcement of weekly unemployment numbers also noted that more than 29 million people have claimed some sort of unemployment benefits this year.

The financial help has come as regular state-administered program payments or from special pandemic unemployment assistance.

The government's precise figure for all types of unemployment benefit claims for the week ending Aug. 15 was 29,224,546. For comparison purposes, DoL notes that in the comparable week in 2019 unemployment claims totaled 1,639,622.

The 29.2 million unemployment claims amount is this weekend's By the Numbers figure.

Update, Sept. 6, 2021: The Delta variant has wreaked havoc on the economy in 2021. The August 2021 jobs report reflects that.

Taxable unemployment money: The unemployment data also serves as a reminder for those who got any of the financial assistance this year that the Internal Revenue Service expects you to pay tax on your unemployment benefits.

The recipients of the financial help need to take this tax liability into account now since the next estimated tax payment deadline is Sept. 15.

To clarify the issue of taxes and unemployment insurance, the IRS answers five questions in IRS Publication 5444. They are listed below, along with a sixth question and answer about state taxes on unemployment.

Q1. Do I have to report unemployment benefits on my federal income tax return? 
A1: Yes, any unemployment compensation received during the year must be reported on your federal tax return.

2021 UPDATE: The American Rescue Plan Act (ARPA), a COVID-relief law that took effect on March 11, 2021, exempts up to $10,200 in unemployment insurance (UI) benefits issued in 2020. The amount is per person, so a married couple where both spouses got UI would not owe tax on up to $20,400. The IRS automatically issued refunds to taxpayers who filed before ARPA's enactment and overpaid tax on their unemployment benefits. However, you should double check your filing situation and file an amended return if needed

Q2. How will I know how much unemployment compensation I received? 
A2: If you received unemployment compensation during the year, you should receive Form 1099-G from your state’s unemployment office.

Q3. How will unemployment compensation affect my tax return? 
A3: If you do not have taxes withheld from your unemployment compensation, it could result in a tax liability.

Q4. Can I have federal income tax withheld from my unemployment compensation? 
A4. Yes, you can choose to have federal income tax withheld from your unemployment benefits by submitting a Form W-4V, Voluntary Withholding Request, to your state’s unemployment office.

Q5. If I am no longer collecting unemployment benefits, how can I pay the tax due? 
A5. You can make estimated tax payments at www.irs.gov/Form 1040-ES and/or increase your withholding once you have a new job. You can check your estimated withholding using the calculator at www.irs.gov/W4app. See www.irs.gov/payments for more payment options.

Q6. Will I also owe tax to my state on my unemployment benefits? 
A6. Most states that have a personal income tax also follow the federal government when it comes to taxation of unemployment benefits. That means that in most cases, the benefits are fully taxable.

However, a handful exempt unemployment from taxation. And a couple of states tax only a part of the benefits. Here's the breakdown on the non- or less-taxing situations:

— Six states exempt unemployment benefits from income taxes. They are Alabama, California, Montana, New Jersey, Pennsylvania and Virginia.

— Indiana and Wisconsin may tax only a portion of your unemployment benefits.

— New Hampshire and Tennessee only tax individuals' investment income so unemployment benefits are off the hook here.

— Seven states don't have any personal income tax, hence no tax on unemployment money. They are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Unemployment moves to make now: If you do or did get unemployment this year, two things to remember.

First, even though you'll get Form 1099-G, keep good records of your benefit payments.

Second, pay at least some estimated tax. That will let the IRS know you understand that your unemployment benefits are taxable and that you're trying to fulfill your tax obligation.

Also, any estimated tax amounts now will reduce the amount of tax you'll owe when you do file your return next spring, as well as limit the penalty you could face for not paying estimated taxes on time. 

You also might find these items of interest:


Coronavirus Caveat & More Information
In 2021, we all still are 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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