Taxes on Unemployment

[happystuff]

Just an fyi for anyone who had received unemployment, including the bonus $600 per week, I got an email about filing. It says, in part:

You are responsible for paying federal income taxes on any < my state> Unemployment Insurance benefits you received in 2020. The attached file (1099-G) includes the amount of unemployment benefits you collected and what amount, if any, was withheld from your benefits for tax purposes.

If you received Unemployment Insurance, Pandemic Unemployment Assistance, Pandemic Emergency Unemployment Compensation or Extended Benefits, you may have chosen to withhold 10% of your benefits for tax purposes. That option was not available for the supplemental $600 Federal Pandemic Unemployment Compensation (FPUC) or $300 FEMA Lost Wages Assistance payments. You are responsible for paying any required federal taxes on any unemployment compensation payments you received in 2020.

I had a feeling, so I'm glad I saved as much of the extra as I did.

[catherine]

Yeah, when DS applied for unemployment I advised him to select the option of having a portion deducted for taxes so he wouldn't have to worry about it if things were still tight for him in April 2021. Even though he also saved a good bit of the money and would be able to pay his taxes, he feels better knowing he still gets to keep the stash he's got. He may even get a refund.

[happystuff]

I had withholding on the regular, but it is the "bonus" payments - where there was no option for withholding - that I worried about. That really did end up being a lot of money, so I'm not quite sure if I'll owe or the regular withholding will be sufficient coverage.

[catherine]

I had withholding on the regular, but it is the "bonus" payments - where there was no option for withholding - that I worried about. That really did end up being a lot of money, so I'm not quite sure if I'll owe or the regular withholding will be sufficient coverage.

Oh, I'm not quite sure what DS did about that. I never thought it made much sense to tax unemployment benefits anyway.

[Tradd]

Anyone who is smart about it, will have the taxes taken out from each unemployment check. That’s what I did.

Ugh. Just read it was for the extra $600. Which I got for every week I was out of work. Yuck.

[GeorgeParker]

Anyone who is smart about it, will have the taxes taken out from each unemployment check.

If they withhold income tax on your unemployment checks, you're giving the government an interest free loan.

If you're really worried about having enough money to pay the income tax when it comes due, set aside 10%-15% of your unemployment check in a savings account as each check arrives. That way you have the cash available for emergencies and you're earning interest on the savings account instead of lending your money to the government for free. {Your income tax withholding rate may be higher or lower. Base it on a recent paycheck.}

I was always baffled by my co-workers who would brag about getting a $300-$500 income tax refund. Especially if they knew they could reduce the amount being withheld from their paycheck but wouldn't do it because they were treating income tax withholding like an automatic savings account.

[Tradd]

If they withhold income tax on your unemployment checks, you're giving the government an interest free loan.

If you're really worried about having enough money to pay the income tax when it comes due, set aside 10%-15% of your unemployment check in a savings account as each check arrives. That way you have the cash available for emergencies and you're earning interest on the savings account instead of lending your money to the government for free. {Your income tax withholding rate may be higher or lower. Base it on a recent paycheck.}

I was always baffled by my co-workers who would brag about getting a $300-$500 income tax refund. Especially if they knew they could reduce the amount being withheld from their paycheck but wouldn't do it because they were treating income tax withholding like an automatic savings account.

Really? Here in IL, my state unemployment was $384/week. I was very fortunate to get the $600/week.

If all you’re getting is $384/week, do you really think people are going to put aside money for taxes if they’re worried about paying rent and such?

[catherine]

If all you’re getting is $384/week, do you really think people are going to put aside money for taxes if they’re worried about paying rent and such?

Exactly. Of course it's the sensible idea, but having been in the crapper and on unemployment myself, I know that you need every scrap of money that falls into your lap. Then when you get on your feet and are maybe better off at tax time, the tax bill can be a real burden. That's why I feel the government should just send you the money tax free, even if it's a reduced amount. Yes, some will feel it's treating adults like children and being NannyG, but when you are unemployed, you are desperate, and when you are desperate you don't always make the "wise" decision. You make the decision that is going to fill the greatest needs of the day.

[GeorgeParker]

Really? Here in IL, my state unemployment was $384/week. I was very fortunate to get the $600/week.

If all you’re getting is $384/week, do you really think people are going to put aside money for taxes if they’re worried about paying rent and such?

I too have been unemployed, and I got less than $348 per week. Given a choice between withholding or not withholding. I chose to not withhold because I'd rather earn interest on that money instead of lending it to the government for free.

My opinion has nothing to do with the extra covid unemployment payments. I'm talking about the smart thing to do with any income where you have the option to withhold or not withhold taxes.

It is always better to receive interest than to loan money to someone for free. Period. If a person doesn't have the willpower to stash that tax money in a savings account, then to thine own self be true and let the government withhold it. But that isn't the smart thing to do.

As far as people with small unemployment checks needing to have the income tax withheld because if they have it in their hand they'll probably spend it instead of saving it: Which is better: to buy food and pay your rent, or to give the government an interest-free loan and go hungry?

Imho it is better to have enough money to pay rent and buy food and pay for other necessities, even if you end up owing more income tax than you can pay and having to pay the relatively low interest rate the IRS charges you for not paying your taxes on time.

To be clear about my intention: When you say "Anyone who is smart about it will have the taxes taken out" what that really means is anyone who doesn't have income tax withheld is being dumb. Well, I am not dumb, and imho it is smarter to not have income tax withheld if you have that option. YMMV

[happystuff]

I too have been unemployed, and I got less than $348 per week. Given a choice between withholding or not withholding. I chose to not withhold because I'd rather earn interest on that money instead of lending it to the government for free.

My opinion has nothing to do with the extra covid unemployment payments. I'm talking about the smart thing to do with any income where you have the option to withhold or not withhold taxes.

It is always better to receive interest than to loan money to someone for free. Period. If a person doesn't have the willpower to stash that tax money in a savings account, then to thine own self be true and let the government withhold it. But that isn't the smart thing to do.

As far as people with small unemployment checks needing to have the income tax withheld because if they have it in their hand they'll probably spend it instead of saving it: Which is better: to buy food and pay your rent, or to give the government an interest-free loan and go hungry?

Imho it is better to have enough money to pay rent and buy food and pay for other necessities, even if you end up owing more income tax than you can pay and having to pay the relatively low interest rate the IRS charges you for not paying your taxes on time.

To be clear about my intention: When you say "Anyone who is smart about it will have the taxes taken out" what that really means is anyone who doesn't have income tax withheld is being dumb. Well, I am not dumb, and imho it is smarter to not have income tax withheld if you have that option. YMMV

Glad this method works for you! But please remember that everyone isn't you and it may not be what others consider their best method at the time they are deciding.