Reminder: IRS Taxes Unemployment
It is important to remember that the IRS and states (California in my case) treat unemployment differently. California does not tax unemployment income that you receive. IRS DOES view employment an income and is taxed the same as regular earned income.
This is why it is important to pay attention to that little check box on your employment would have them withhold federal taxes for you. I understand, even from personal experience, that when you are on unemployment you are in need of every dollar you could possible get. However, from my experience I chose to have them withhold federal taxes from your unemployment checks. Why? Because at the end of the year you are still going to have to pay tax on it so paying a little week can be more manageable than a lump sum at the end of the year.
Using numbers from my own past let’s look at these numbers. Unemployment could pay someone $450 weekly, or if they do withhold federal tax would pay $405 per week ($45 to IRS). If you are unemployed for 3 months than after 13 weeks your possible tax liability would be $585. If longer, like has been experienced with Covid, after 6 months could owe $1,170 when you go to file your taxes. After being out of work and having depleted your emergency savings funds (which you hopefully had) having to pay either of these amounts can hurt. That is why I want everyone to be aware of this.
So make sure you receive your 1099-G from your state for your unemployment Tell your Registered Tax Professional about your unemployment income so it can be reported on your Schedule 1 Part 1 (Additional Income). In the end the IRS will have this income reported to them so be sure you remember to report it and avoid paying even more in penalties.
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