Unfortunately, many employees have been furloughed or lost their jobs recently due to the pandemic and are collecting state unemployment benefits. Traditionally, any unemployment benefits received are taxable both federally and for state purposes. Those collecting unemployment will receive Federal Form 1099-G by January 2021 which reports the total amount of benefits they received in unemployment during 2020.
The state department paying the unemployment benefits doesn’t automatically withhold federal or state taxes from unemployment benefits. If a person wants federal withholding from their unemployment benefits, they would need to complete Form W-4V. The maximum federal tax amount that can be withheld from unemployment benefits is 10%. Some states do not provide for any state withholding from unemployment benefits.
Most likely, taxpayers who receive benefits may ultimately fall into a federal tax bracket higher than 10%. Therefore, it would be beneficial to estimate the federal and state taxes due on any unemployment benefits received. This allows taxpayers to set aside that money in order to avoid a cash crunch next April when they file their 2020 tax return. It’s even possible that quarterly estimated tax payments may be needed to avoid underpayment penalties.
If you need help determining how to estimate the federal and state taxes due on unemployment benefits and if there is a need to pay quarterly estimated tax payments, please contact us at 401-831-0200.