The truth about paying taxes on unemployment checks – CNET [CNET]

The COVID-19 pandemic has thrown the economy up in the air, with millions of Americans out of work. Even though you might not be earning a paycheck, you can cover your expenses with unemployment insurance.

While unemployment benefits are crucial for many people who are out of work right now, collecting unemployment might cost you when tax time rolls around.

Read more: Lost your job? Here’s what to do with your 401(k)

You can file for unemployment when you’ve lost your job through no fault of your own. Through the CARES Act, unemployment insurance boosted weekly paychecks by $600 and extended coverage an additional 13 weeks. That original plan expires July 31, although you can still apply for and receive unemployment insurance — just without the extra benefits.

Do you have to pay taxes on unemployment?

If you’re collecting unemployment, the IRS considers this “taxable income.” When you file taxes next year for tax year 2020, you’ll need to claim your unemployment checks as income. You’ll be taxed at your ordinary tax rate. 

If you received unemployment insurance this year, you’ll receive a Form 1099-G, which shows how much money you received from unemployment benefits. 

Whether you received extra cash from the CARES Act or collected before it went into effect (or after it expires), your checks are considered taxable income. If you pay state income tax, you may also have to pay taxes at the state level as well as the federal level.

Depending on where you live, your unemployment checks might be tax-exempt. There are a few states that waive unemployment income taxes:

• California
• Montana
• New Jersey
• Oregon
• Pennsylvania
• Virginia

Read more: Coronavirus hardship loans: What they are, how they work and how to get one

How to avoid a large tax bill

For most people, you’re going to pay taxes on your unemployment benefits at some point or another. You have a few different options: 

• Paying when you file your tax return.

• Make estimated quarterly tax payments.

• Have your taxes automatically withheld.

If you want to maximize your benefits now — especially if you need every dollar of your unemployment insurance — you can pay your increased tax bill when you file your return next year.

But if you can afford it, you can either make quarterly tax payments or sign up to have taxes automatically withheld.

Estimated quarterly payments: Many sole proprietors and freelancers make estimated quarterly tax payments for business purposes (including side hustles), and you could pay your taxes the same way. This is helpful for spreading out what you owe and paying every three months. But because they’re estimated, you could end up paying too little and facing a tax penalty. Or you could estimate too much and overpay, but then you’re waiting on a tax refund. 

Automatically withheld: If you want your unemployment checks taxed like a regular paycheck, you can complete a Form W-4V. This allows you to get taxed up front, avoiding a major tax bill when you file next year. This gets taxes out of the way, but if you need as much money as possible, this lessens how much you’ll have at your disposal right now.

Read more: How to estimate your 2020 tax refund: Tips, calculators and more