A reader writes in: “I lost my job due to COVID-19 and I’m applying for unemployment. Is this subject to tax?”
Answer: Unfortunately, yes. Unemployment benefits are generally subject to federal income tax and maybe state income tax too. It’s not a free lunch.
Currently there is no special federal income tax exemption for unemployment benefits provided through the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Under the CARES Act, any eligible unemployment person is entitled to receive regular unemployment benefits from the state, plus $600 a week more from Uncle Sam from April 5, 2020 until July 31, 2020. If you qualify for state benefits, the extra $600 is added to your weekly amount. But both federal and state benefits are taxable at your regular tax rates. If you qualify for unemployment benefits through your state, the extra money will be automatically added to your state benefits.
In 2021, you will receive Form 1099-G, Certain Government Payments, listing the total unemployment received in 2020. Use this form when you file your 2020 return. If you want tax automatically withheld from your benefits, file Form W-4V, Voluntary Withholding Request. This instructs the government authority to withhold 10% of each payment for income taxes.
Small Business Tax Strategies