Despite last year's Great Resignation, the United States work scene seems to getting back on track.
Today's Department of Labor weekly jobs report showed fewer first-time unemployment filings, continuing a recent downward trend. The latest national unemployment rate analysis in January showed a 4 percent unemployment rate, indicating the COVID-19 Omicron variant effects are subsiding.
That's good news for those with new jobs, the companies hiring them, and the overall economy.
But for the 223,000 individuals who most recently applied for unemployment, things are still challenging.
Taxable unemployment: On top of learning to live on unemployment benefits, they'll face taxes on the government financial assistance they get this year.
That same tax concern also applies to those who got unemployment last year and now are filing their 2021 returns.
The American Rescue Plan provision that made the first $10,200 in unemployment benefits paid in 2020 tax-free was not extended for the 2021 tax year. So the prior law is back in place.
And that law says all unemployment benefits are taxable income. That's of immediate concern for the ol' blog's readers who got the payments in 2021, or are doing so in 2022.
It's taxable income: Yeah, I know, unemployment benefits in most cases are not enough to make up for lost wages. In the wake of a layoff years ago, the hubby and I had to face the reality of trying to stretch the assistance until we were able to rejoin the two-earner ranks.
The unemployment payments are, however, plenty enough for the Internal Revenue Service to collect taxes.
I know what you're thinking. Taxing unemployment benefits doesn't seem quite fair. But as fatalists says, it is what it is.
Here's how you deal with this unwelcome tax reality.
Reporting unemployment: Since the unemployment benefits are taxable, you report them on your annual tax return.
Don't ignore this tax task. The IRS will get a copy of the Form 1099-G, Certain Government Payments, that you'll receive with details of out-of-work payments. All your unemployment earnings are clearly noted in Box 1 of that form.
Enter that amount on Form 1040 Schedule 1 line 7, which notes it's for unemployment compensation.
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 25 of your 1040, along with any other withholding, like that shown on a W-2 detailing 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.
That's one of the reasons that I hope you soon will stop being a federal economic statistic, and begin again collecting a regular paycheck.
You also might find these items of interest:
- 5 tax tips for freelancers, gig economy workers
- Moves to make (+ tax tips!) if you've lost your job
- Unemployment tax troubles: wrong 1099-G amounts & benefits ID theft