Unemployment compensation is taxable; have tax withheld now and avoid a tax-time surprise.
With millions of Americans now receiving taxable unemployment compensation, many of them for the first time, the Internal Revenue Service is reminding people receiving unemployment compensation that they can have tax withheld from their benefits now to help avoid owing taxes on this income when they file next year.
By law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.
Withholding is voluntary. Federal law allows any recipient to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request (PDF), and give it to the agency paying the benefits. Don’t send it to the IRS. If the payor has its own withholding request form, use it instead.
Returning to work? Avoid owing taxes at the end of the year by using the IRS Tax Withholding Estimator.
Recipients who return to work before the end of the year can use the IRS Tax Withholding Estimator to make sure they are having enough tax taken out of their pay. Available only on IRS.gov, this online tool can help any worker or pension recipient avoid or lessen their year-end tax bill or estimate the refund they want.
In January 2021, unemployment benefit recipients should receive a Form 1099-G, Certain Government Payments (PDF) from the agency paying the benefits. The form will show the amount of unemployment compensation they received during 2020 in Box 1, and any federal income tax withheld in Box 4. Taxpayers report this information, along with their W-2 income, on their 2020 federal tax return.