Wintrust Financial : Unemployment benefits are taxed, but you get to choose how

Millions of Americans are still relying on unemployment benefits to get by during the coronavirus pandemic.

In April 2020, the president signed a new $900 billion aid package into law, authorizing another 11 weeks of federal payouts that are added to qualifying Americans' state benefit checks.

Under the CARES Act passed in March, jobless people received $600 on top of their weekly state benefits. The new legislation pays $300 a week.

Unemployment insurance is a joint state-federal program. If you're getting benefits from either during this time, it counts as income in the eyes of the IRS.

Are unemployment benefits taxed?

Yes, you have to report any unemployment compensation you receive on your federal tax return and potentially your state return as well. The money will ultimately be included in your gross income and taxed at your ordinary income rate.

You do, however, have a choice of how you'd like to pay the tax you owe - either through withholding or estimated quarterly payments.

If you want your taxes automatically taken from your benefit check or direct deposit before you get paid, like they would be from a traditional paycheck, then you need to file Form W-4V (Voluntary Withholding Request). This will instruct the payor - most likely your state government - to withhold 10% of each payment for federal income taxes. It will also take a portion of the money for state taxes, if applicable.

The other option is to make quarterly payments directly to the IRS for the amount you estimate you'll owe. Keep in mind that this method requires doing some calculations, meeting payment deadlines every three months, and may result in a penalty charge if you underpay.

Regardless of how you decide to pay your taxes, you'll receive Form 1099-G (Certain Government Payments) early next year listing the sum total of unemployment payments you received in 2020. You use this form to fill out your tax return.

If your unemployment benefits aren't coming from the state or federal government, they might not be fully taxable. Payments made to unemployed workers who voluntarily contributed to a non-union unemployment fund are only taxable if they exceed the amount contributed by the individual.

This article was written by Tanza Loudenback from Business Insider and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to [e-mail].