Is Unemployment Taxable? Coronavirus Unemployment Changes

With a large number of taxpayers across the country being affected by Covid-19, weather economically or medically, it has forced millions to file for unemployment. In fact, over 43 million people have applied for unemployment since the beginning of the pandemic. In response to this, the Coronavirus Aid, Relief, and Economic Securities (CARES) Act was passed, which created temporary changes to how taxpayers receive unemployment and when they can apply. Most importantly though, taxpayers need to be aware of whether these changes could cause them tax issues at the end of the year.

 
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What Changed With The CARES Act

Before the CARES Act was put into place, a taxpayer would be eligible for unemployment benefits if they lost their job due to no fault of their own and they had met the state requirements for wages earned or time worked. The taxpayer also had to go through a waiting period before being eligible to apply for unemployment. Once they began receiving unemployment, there was a limit to the amount of time a taxpayer could receive unemployment and they were required to actively be looking for work. The unemployment benefits themselves were issued as a percentage of what you were previously making at your job.

unemployment benefits eligibility

Expanded Eligibility

Now, with the CARES Act in place the process for applying for unemployment benefits and the amount that is received has drastically changed. One of the biggest changes is that taxpayers who would have previously not been eligible such as independent contractors, self-employed individuals, and those with limited work history can now receive unemployment benefits.

No Waiting Period

In addition to the expansion of who is eligible for unemployment benefits is the elimination of the waiting period to apply. Now, leaving the waiting period in place is still at the states discretion but, the federal government has stated that if states waive the waiting period they will pay 100% of the benefits for the taxpayer's first week of benefits.

Extended Time For Benefits

Previously a taxpayer was given a maximum of 26 weeks of unemployment benefits but, the CARES Act has extended this to an additional 13 weeks. This extension will last through Dec. 31, 2020.

Additional Benefits

Finally, if a taxpayer is receiving unemployment benefits between April 5, 2020 and July 31, 2020 they will receive an additional $600 per week on top of what they would regularly receive.

Are These Benefits Taxable?

Before the CARES Act, unemployment benefits were subject to federal income tax and as of right now these benefits will remain as taxable. This means that not only are the regular benefits taxable but the additional $600 a week is also taxable.

Unemployment benefits could also be subject to state income tax depending on which state the taxpayer lives in. For states with no state income tax like Texas, Nevada, and Florida unemployment benefits would not be subject to state income taxes. Some states like California, New Jersey, Oregon, Pennsylvania, Montana, and Virginia do have state income tax but have opted to not make unemployment benefits taxable.

How To Avoid Owing When You File

estimated tax payments

A taxpayer who has received unemployment benefits will need to make sure they set aside a portion of that money for federal income taxes and state income taxes (if applicable). Generally, the minimum amount to set aside is 10% of the benefits received but, it may need to be more depending on other income you receive prior to receiving unemployment benefits or income you may receive after you are no longer receiving unemployment.

 

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Conclusion

With the changes the CARES Act made to unemployment benefits, more people are able to receive benefits to help offset the income they would have otherwise been making. However, these benefits will need to have taxes paid on them and so it is important to keep track of how much is being received. If no tax is paid on the benefits during the year, you will either need to pay when your tax return is filed or you may end up owing the IRS, which could cause other issues.

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