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Income Tax Withholding Will Soon Come Due For Many Who Received Unemployment Benefits This Year

It is one more unfortunate byproduct of the COVID-19 crisis, but it’s also a simple reality—unemployment benefits qualify as income, and all income is taxed at both the state and federal level.

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It is one more unfortunate byproduct of the COVID-19 crisis, but it’s also a simple reality—unemployment benefits qualify as income, and all income is taxed at both the state and federal level.

When the global COVID-19 pandemic fully took hold of our region in late March of this year, many companies found themselves having to make the unfortunate but necessary decision to either furlough or lay off members of their workforce. This became a simple reality of the COVID-19 crisis—numerous companies of all sizes, particularly the small and medium-sized ones, had to seriously curtail the work they were doing because of lack of customer demand. And for many small businesses—including those in the restaurant, hospitality or consumer-facing industries—the shutdown was complete, at least for a while.

When this happened, unemployment numbers jumped to levels we hadn’t seen in the northeast since the Great Recession a decade earlier, and laid off and furloughed workers rushed to file for unemployment benefits to help them endure what they hoped would only be a temporary interruption. The benefits were readily available for those who qualified, and when Congress passed the $3 trillion stimulus package known as the CARES Act on March 27th, they also took the action of adding $600 each week to the unemployment benefits being received by those workers who qualified for it. Again, these were all necessary steps taken to both help our struggling business sector as well as to allow displaced workers a bit more breathing room.

While the COVID-19 crisis is still with us and even escalating once more as a public health threat, many businesses were eventually able to reopen and bring back members of their workforce. However, for those workers who had received unemployment benefits during the shutdown, a new reality is now coming to light—if they didn’t have federal or state income taxes withheld from their unemployment checks, they will now need to pay them. And that could mean thousands of dollars owed by Tax Day next April.

The decision not to withhold when receiving unemployment benefits made sense at the time for many. People found themselves very unexpectedly out of work and were worried about making ends meet, and when given the option to “withhold or not to withhold,” the decision was a simple one. Not withholding meant more money in their pockets during this challenging time, so they went in that direction.

But those federal and state taxes are still due, and those who now find themselves facing hefty tax bills should consider acting sooner rather than later to begin rectifying this situation. There are indeed options available.

The first step is for people to visit www.irs.gov and use the tax calculator available on the website to determine what they may owe at the federal level. If they are able, they may want to make an estimated payment before the end of the year to “stop the bleeding” and avoid possible penalties and interest on taxes owed. If that is too steep for them right now, they can consult the IRS website and looked into creating an installment plan to begin to pay down the amount owed. Similar steps can be taken with state revenue-collecting agencies as well.

It is one more unfortunate byproduct of the COVID-19 crisis, but it’s also a simple reality—unemployment benefits qualify as income, and all income is taxed at both the state and federal level. It’s understandable people didn’t think about this when they were out of work and receiving these benefits, but the year is now nearly over and these taxes will now have to be paid before too long. Solutions likely exist to make this new tax burden easier to bear, but it has to start with addressing the issue head on, figuring out what is owed and making a plan to pay it. The best thing for people to do is to act now rather than be surprised in April.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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