If you’re one of the more than 38 million Americans who filed jobless claims during the coronavirus pandemic, don’t forget that Uncle Sam taxes those unemployment benefits.
“Unemployment benefits are considered a replacement for lost wages,” Caroline Bruckner, a tax professor at the Kogod School of Business at American University, told Yahoo Finance’s On the Move (video above). “So just like your earnings or wages would be taxable, unemployment benefits are taxable as well.”
If you don’t request taxes to be withheld from your unemployment payments, you could even end up owing the government. You can request federal income taxes to be withheld by submitting Form W-4V, which is a voluntary withholding request. Otherwise, you may be required to pay quarterly estimated payments.
At tax time, you will receive a Form 1099-G showing how much unemployment income you received during the year. Any of that income must be included in your taxable income.
Gig workers and tax time
Bruckner also offered tax tips for gig workers, many of which have been hit hard during the COVID-19 outbreak.
Tax day has been extended to July 15 from April 15 due to the pandemic, and this affects quarterly estimated payments differently — which gig workers, contractors, and self-employed workers must pay.
These workers have until July 15 to pay both their first and second quarter payments. Before, first quarter payments were due on April 15 and second quarter payments were due June 15.
Bruckner said gig workers should keep careful records of their income and expenses because many platforms they work for are not required by the Internal Revenue Service to send information reporting forms like 1099-MISC.
“Gig economy workers historically have great challenges in complying with tax obligations — most don’t get any information reporting forms,” Bruckner said. “That creates a big mess at tax time.”