CARES Act Unemployment Benefits and Your Taxes

CARES Act Unemployment Benefits and Your Taxes


in covid-19 tax relief, Employment, IRS Info, Tax Info, Tax News
CARES Act Unemployment Benefits and Your Taxes

To help the many Americans experiencing unemployment during the novel coronavirus pandemic, this March the federal government passed the CARES Act. One of the provisions in the CARES Act, Pandemic Unemployment Assistance (PUA), expands unemployment benefits, allowing workers who are usually not eligible for unemployment benefits to qualify for the program. Thanks to PUA, certain business owners, self-employed workers, independent contractors, and workers with a limited work history can currently qualify for unemployment. Another provision in the CARES Act, Federal Pandemic Unemployment Compensation (FPUC), also provides a limited time weekly bonus of $600 to individuals who are collecting unemployment benefits through the traditional Unemployment Insurance (UI) program or the new PUA program.

The expanded unemployment benefits in place due to the CARES Act have come as a relief to many Americans who are currently unemployed during the COVID-19 pandemic. More than 40 million Americans have filed for unemployment benefits since the outbreak of the coronavirus pandemic, and many filers will be receiving employment benefits for the first time thanks to PUA. If you’re among the Americans who will be receiving unemployment benefits for the first time this year, you may be wondering: are unemployment benefits taxable? Read on to learn the answer to this question and more as we go over what you need to know about unemployment benefits and your taxes.

Are Unemployment Benefits Taxable?

Yes, unemployment benefits are taxable. The Internal Revenue Service classifies the money a person receives from unemployment benefits as taxable income. Unemployment compensation must be included in a person’s income on their state and federal income tax returns and is taxed at their ordinary income tax rate.

Are CARES Act Unemployment Benefits Taxable?

Yes. Several provisions in the CARES Act added new elements to unemployment, but it did not change the way the IRS classifies unemployment benefits. All unemployment compensation is considered taxable income by the IRS. This includes the employment benefits a person may receive through the PUA program. It also includes the $600 weekly boost for unemployed workers allotted by the FPUC program.

It’s worth noting that there is some confusion around CARES Act-related unemployment benefit taxes because another well-known element of the CARES Act, stimulus checks, is not taxable. Technically, the stimulus checks that the federal government has sent out to millions of Americans this year are regarded as tax credits. Therefore, these stimulus checks (also called economic impact payments) are exempt from federal tax and state taxes. However, unemployment compensation is not an income tax credit in the eyes of the IRS. It is taxable income. Persons who are receiving unemployment benefits due to the CARES Act should be mindful of this difference and save for their taxes accordingly.

How Do You Pay Taxes on Your Unemployment Income?

There are three ways to pay taxes on your unemployment income: have your taxes withheld, pay quarterly estimated tax payments, or pay your tax bill when you file your next income tax return.

Tax Withholding

Those who would like to have their federal and/or state income taxes withheld from their unemployment benefits can file a Voluntary Withholding Request (Form W-4V). If you file a Form W-4V, your taxes will be automatically withheld from your unemployment income, just like it would be if you had your taxes withheld from a regular paycheck.

Quarterly Estimated Tax Payments

Individuals who would like to pay quarterly estimated taxes on their unemployment income can send their quarterly payments directly to the IRS online, by phone, through the IRS2Go app, or by sending their payment along with tax Form 1040-ES by mail.

With Yearly Tax Return

Those who have received unemployment benefits can pay their unemployment benefits when they file their next income tax return. By January 31 of the next year following a year in which you received unemployment benefits, you should receive a Form 1099-G from the state that paid you unemployment benefits, which you can use when you calculate your gross income.