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3 ways to handle unemployment benefits when it comes to income taxes

Closed sign. (Photo by Michael Anthony from Pexels.)

After the COVID-19 pandemic swept the nation, many were left without jobs or income. In March 2020 alone, about 10 million Americans applied for unemployment, the Washington Post reported.

For those who turned to unemployment benefits last year, with tax season upon us, you might be wondering how itā€™s all going to shake out when it comes to filing your income taxes.

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Though the rules can vary in each state, for most, residents can qualify for unemployment if you became unemployed through no fault of your own.

But hereā€™s the thing: You still have to pay federal taxes on said unemployment benefits.

How much you get taxed all depends on where you fall in the tax bracket (see below).

Tax RateTaxable Income (Single Filer)Taxable Income (Married, Filing Jointly)Taxable Income (Married, Filing Separately)Taxable Income (Head of Household)
10%$0 to $9,875$0 to $19,750$0 to $9,875$0 to $14,100
12%$9,876 to $40,125$19,751 to $80,250$9,876 to $40,125$14,101 to $53,700
22%$40,126 to $85,525$80,251 to $171,050$40,126 to $85,525$53,701 to $85,500
24%$85,526 to $163,300$171,051 to $326,600$85,526 to $163,300$85,501 to $163,300
32%$163,301 to $207,350$326,601 to $414,700$163,301 to $207,350$163,301 to $207,350
35%$207,351 to $518,400$414,701 to $622,050$207,351 to $311,025$207,351 to $518,400
37%$518,401 or more$622,051 or more$311,026 or more$518,401 or more

Here are three ways to handle taxes on unemployment benefits:

1. Withhold

Dave Ramsey, a personal finance adviser, radio show host, author and businessman, says the best thing you can do when you first sign up for unemployment is to choose to have 10% of each payment held to cover some of or everything you owe in federal income taxes. It ensures you wonā€™t have that burden later, giving you a head start when tax season approaches.

2. Pay quarterly

If you didnā€™t have your taxes withheld, another option is to send quarterly estimated taxes on that money to the IRS.

When quarterly taxes are due:

When you get paidTax due date
Jan. 1ā€“March 31April 15
April 1ā€“May 31June 15
June 1ā€“Aug. 31Sept. 15
Sept. 1ā€“Dec. 31Jan. 15 (the following year)

Click or tap here to learn how to estimate what youā€™ll owe quarterly.

But know this going into the upcoming tax season: If you havenā€™t filed quarterly up to this point, and you didnā€™t have it withheld, you will have to pay it all by April 15.

3. Pay it all when tax season gets here.

Ramsey doesnā€™t recommend this route. It can be costly, and you might even be slapped with a penalty for not paying estimated taxes if theyā€™ve piled up. If youā€™re still receiving unemployment, or might be in the near future, consider your other options, as it will not be as hard a hit.

Ramsey said if youā€™re left with paying a huge chunk to the IRS this season, try meeting with a tax adviser who can help you out.

ā€œNothing takes the stress out of Tax Day like having a tax adviser in your corner who eats, sleeps and breathes all this tax stuff on a daily basis,ā€ he said.


About the Author
Dawn Jorgenson headshot

Dawn Jorgenson, Graham Media Group Branded Content Managing Editor, began working with the group in April 2013. She graduated from Texas State University with a degree in electronic media.

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