What are unemployment benefits?
Unemployment benefits include various types of compensation and unemployment income. They include unemployment insurance benefits paid to you by the state, disability benefits paid in lieu of unemployment compensation, and unemployment insurance benefits for railroads. They also include any payments you receive from the Federal Unemployment Trust Fund and federal unemployment grants due to the pandemic.
How do taxes on unemployment benefits work in 2022?
You should receive a Form 1099-G from your state or the agency paying your unemployment benefits early in 2023 for the unemployment income you received in 2022. The total amount of your benefits should appear in Box 1 of the form. The federal tax office will also receive a copy of your Form 1099-G, so they will know how much you received. You do not need to include the form when filing your federal tax return.
Note: Unemployment benefits are not subject to Medicare or Social Security taxes, only income tax. This may help reduce your overall tax burden for the year you are claiming.
How to prepare for your tax bill for 2022
You can withhold income tax from your unemployment benefits, so you do not have to pay it all at once when you file your tax return, but this will not happen automatically. You must fill out and submit Form W-4V to the agency that pays you the benefits. The withheld amounts will appear in Box 4 of your Form 1099-G.
You can withhold federal taxes from your benefits, but this is limited to 10% of each payment. This may not be enough to cover the taxes on the benefits you received. If you return to work, you can choose to withhold additional tax from your paychecks until the end of the year to help cover the taxes due on your unemployment benefits in addition to your regular salary.
Your other option is to make estimated quarterly payments for any tax you think you might owe on your benefits. You have until January 15 to make estimated tax payments on any benefits you receive between September and December of the previous tax year. In fact, you should do this if not enough tax was withheld from your unemployment benefit payments. You may be subject to a tax penalty if you do not “pay as you go” through either extra withholding or estimated payments throughout the tax year.
Note: The amount you owe in tax on your unemployment benefits may be minimal, depending on the amount you received. This is because unemployment does not replace 100% of the wage you were previously earning.
If you can’t pay your taxes
If you are receiving unemployment benefits and did not withhold federal income tax or make estimated payments, you may find yourself in a situation where you owe a larger amount in taxes than you were expecting. This may lead to financial hardship for you, as you may have already lost some income due to unemployment.
For some taxpayers, this may mean they have to choose between paying rent and buying groceries or sending estimated tax payments to the federal tax office. If you find yourself in this situation, the federal tax office provides you with options.
You can apply for a short-term or long-term installment agreement with the federal tax office to pay your tax debt in monthly installments. You can apply online, or you can apply by phone or by mail by submitting Form 9465 to the federal tax office. Form 9465 helps you determine the amount the tax office is willing to pay over 72 months. However, it allows you to choose smaller payments if you can justify it in Form 433-F why you cannot make the payment specified in Form 9465.
Note:
Even with a repayment plan, you will still have to pay any penalties or fees or interest that arise from late payment of taxes.
You can also ask the federal tax office to waive any non-payment penalties that have been imposed on you if you feel it is unfair to be asked to pay the penalty. You may also be eligible for a reduction if you became disabled during the year you collected unemployment benefits or retired that year and you were at least 62 years old.
State Income Taxes on Unemployment Benefits
Many states also impose taxes on unemployment benefits. There are several states that do not impose any income taxes at all, so you will be spared if you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming. New Hampshire does not impose taxes on regular income, only on investment income.
However, the states of Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia do have income taxes, but these states will not tax your unemployment benefits as income.
Frequently Asked Questions
How much tax is withheld from unemployment benefits?
You can choose whether you would like to have a 10% federal tax withheld if you are receiving unemployment benefits. Some states may allow you to withhold 5% for state taxes. You may need to make quarterly estimated tax payments or pay taxes when you file your annual tax return if taxes were not withheld from your unemployment checks. In any case, your unemployment income is taxable income, just like any wages or salaries you receive.
What happens to the amount of taxes collected by the government if unemployment is high?
A period of high unemployment may reduce the amount of money that the government collects from taxes. Of course, the national tax system is a complex scheme that is always subject to political and economic changes. The government may raise taxes in the following tax year to make up for the shortfall if it does not collect enough revenue from taxes.
Who pays unemployment taxes?
Income taxes on unemployment benefits are paid by the person receiving the benefits. However, “unemployment taxes” can also refer to taxes imposed under the Federal Unemployment Tax Act (FUTA). FUTA taxes are paid by employers.
Source: https://www.thebalancemoney.com/how-to-handle-taxes-if-you-received-unemployment-last-year-5075759
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