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Tax

Unemployment Benefits Are Taxable

Millions of Americans are now receiving taxable unemployment compensation and received unemployment compensation in 2020. Many of these individuals are receiving these benefits for the first time.

By law, unemployment compensation is taxable and must be reported on the individual’s 2020 and/or 2021 federal income tax return. Taxable benefits include the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and subsequent legislation that extended these benefits. Recipients should receive a Form 1099-G Certain Government Payments showing the amount of unemployment compensation paid to you during the year in Box 1, and any federal income tax withheld in Box 4. Report the amount shown in Box 1 on line 7 of Schedule 1, (Form 1040), Additional Income and Adjustments to Income and attach this to the Form 1040 or Form 1040-SR. Include the withholding shown in Box 4 on line 25b of Form 1040 or Form 1040-SR.

People receiving unemployment compensation can have tax withheld from their benefits to help avoid owing taxes on this income when they file their federal income tax return.

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, you need to fill out Form W-4V, Voluntary Withholding Request, and give it to the agency paying the benefits. The form should not be sent to the IRS. If the payor has its own withholding request form, the alternate form should be used.

If a recipient doesn't choose withholding, or if withholding is not enough, they can make quarterly estimated tax payments instead. For more information, including some helpful worksheets, see Form 1040-ES and Publication 505, available at IRS.gov.

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