Taxability of Unemployment Compensation
The COVID-19 pandemic has caused economic, financial and employment upheaval for many Americans during 2020. As a result, a number of individuals have been collecting unemployment compensation for the first time. In general, unemployment compensation, such as state unemployment insurance benefits, must be included in gross income. Inclusion of unemployment income in gross income may result in an unanticipated additional income tax liability for 2020 at both the federal and state level.
Federal and state government agencies do not typically (automatically) withhold income tax on unemployment benefits. Recipients must request that federal and state income tax be withheld from their unemployment benefits. For many, this represents the easiest solution for avoiding an unexpected tax liability when they file their 2020 tax returns next April. Another option is to submit tax by making quarterly estimated tax payments. The remaining due dates for the third and fourth quarter 2020 estimated tax payments are September 15, 2020 and January 15, 2021, respectively.