Is Pandemic Unemployment Assistance Taxable?

People who received unemployment benefits in 2020 also received a break on paying taxes, but up to a certain amount. If you didn’t know, the rules changed in 2021, and the pandemic unemployment assistance is taxable.

The tax refund might be less than in previous years if you received unemployment payments. If you did not pay tax on the unemployment benefit when you received it, the tax refund might be used for unpaid taxes, resulting in a smaller refund.

Unemployment assistance counts as additional wages; therefore, it is added as extra income and should be highlighted on your tax return.

Pay your unemployment taxes

Is pandemic unemployment assistance taxable, so it is essential to know what you need to do to meet this responsibility. There are several ways to do this.

Most notably, you may be able to pay the full amount at tax time if you don’t expect the benefit to add to any unpaid taxes.

1. Ask your employing agency to withhold federal income tax

You are crediting 10% of each unemployment check toward federal taxes by withholding taxes. This is similar to withholding from a regular paycheck. This action is usually taken when you first collect unemployment benefits.

For tax withholding, you can also complete the Voluntary Withholding Application and submit it to the agency disbursing your unemployment benefits. Some agencies have their form.

Depending on your state of residence, you can change your withholding biweekly (by mail or online) when your benefits need to be certified. This is an advantage for some people.

In those states where you can change your withholding regularly, you may choose to withhold at certain times and not at others, depending on your financial situation. It is advisable to check with your unemployment office to see what options you have.

You can use the estimated tax calculator to ensure sufficient amount withheld for your unemployment benefits. This will prevent you from making quarterly tax payments due to low withholding, and you can also avoid penalties for underpayments.

2. Make quarterly estimated tax payments

To avoid a high tax bill, you can make quarterly payments to the U.S. Treasury during the year. Unlike withholding taxes, the quarterly revenue should be actively maintained, as it is a good idea to pay taxes on time.

You also have the alternative of making estimated quarterly payments and withholding your taxes if your total tax withholding does not completely cover the income taxes you will owe. This option will depend on the amount of your unemployment benefits plus other sources of income if you have them.

In this case, it is helpful to use the estimated payment calculator to determine the amount due on your quarterly tax deposits. These quarterly payments are due four times a year, so in order not to make a mistake, you should know the dates and not forget them:

  • For income from January 1 through March 31, the quarterly estimated tax is due on April 15.
  • For income from April 1 through May 31, the quarterly estimated tax is due on June 15.
  • For income from June 1 through August 31, the quarterly estimated tax is due on September 15.
  • For payment from September 1 through December 31, the quarterly estimated tax is due on January 15 of the following year.

3. Pay taxes in full

If you have no other income and need the full amount of unemployment assistance, this makes estimated quarterly payments impossible, but you have the option of paying your taxes in full when they are due. However, you risk paying the penalty for underpayment of taxes.

The penalty may not be as high, depending on the number of unemployment benefits you receive. There is a possibility that the IRS will waive the liability as long as:

  • You have not made the required payment because of a fortuitous event, a disaster, or other unusual circumstance.
  • You are newly retired or became disabled during the tax year or prior tax year for which you should have made estimated payments.
  • The underpayment was made for reasonable cause and not due to willful neglect.

How the Unemployment Assistance Tax Works

For the tax year 2020 only, the American Bailout Plan granted a federal tax exemption on unemployment benefits. But is pandemic unemployment assistance taxable for the tax year 2021. There are three ways this tax works; know them, so you don’t make mistakes.

1. Federal Unemployment Taxes

This tax at the federal level works as part of your income, such as wages, salaries, and bonuses. It is taxed depending on your federal income tax bracket. However, taxes on unemployment benefits are not automatically withheld as they are for wages.

As a filer, you are responsible for paying your taxes on unemployment benefits. In contrast, with wages, taxes are paid as you go, as you earn them. As an employee, part of your paycheck is deducted directly from federal taxes.

2. State Unemployment Taxes

Some states have a state income tax, which makes it possible that, in addition to that, you may have to pay state income taxes on your unemployment benefits. For states that do not have such a tax or do not consider unemployment assistance taxable, you are not required to pay state income tax on your unemployment benefits.

3. Local Unemployment Tax

Depending on your county or city, you may be taxed on your unemployment benefits at the local income tax rate.