Over 36.5 million Americans have filed for unemployment as the coronavirus pandemic continues to hit the U.S., causing many businesses to discontinue.
Thanks to federal lawmakers, many Americans who are now out of work can apply for unemployment benefits, and get more additional funds under new, temporary rules set in place.
It is imperative to understand that unemployment benefits are not “free money.” According to experts, Americans receiving weekly need to steps to avoid a nasty surprise on their tax bills next year.
How the unemployment landscape changed?
With the U.S. experiencing unemployment rates not seen since the Great Depression, Congress had to act quickly to mitigate the effects. Lawmakers passed the CARES Act, a $2 trillion coronavirus relief package, which boosted unemployment benefits by $600 a week. In addition to that, the new law created the Pandemic Unemployment Assistance (PUA) program, which expanded the eligibility for benefits to include gig workers, independent contractors, self-employed Americans, and those who would not traditionally qualify for assistance.
“More and more states have activated critical new CARES Act benefits,” says Andrew Stettner, a senior fellow at the Century Foundation and a leading unemployment expert. About 3.4 million workers are covered by PUA benefits now, up from 136,000 just two weeks ago.
In 2019, the Department of Labor reported unemployment benefits replaced about 45% of a worker’s pay nationally. The Brookings Institution estimated that the national average weekly payment was $387 before the coronavirus pandemic, but that varies widely by state. For example, the state of Mississippi paid an average of $215 per week compared to those residents in Massachusetts who received $550 per week, on average.
Under the new rules, unemployed Americans are now getting an average weekly unemployment benefit of close to $1,000.
Why withholding makes sense, and how to do it?
You’re not required to have taxes withheld from your unemployment benefits check, but experts say it’s a good idea to go ahead and do so. Taking a hit upfront is better than finding out you owe the IRS at the end of the year.
“I know people really need their money, but so there are no surprises at tax time, I would say request to withhold some of the money,” says Lisa Greene-Lewis, a certified public accountant and TurboTax tax expert.
This is important for if you’ve earned income this year or expect to be rehired or employed again before the end of 2020. You’re likely to be in a higher tax bracket and may not qualify for as many credits to offset your earnings.
To request the withholding, you will need to fill out form W-4V (the “V” stands for voluntary). Depending on your state, this may be available online through the benefits portal. A flat federal tax rate of 10% of the benefits paid can be withheld from each payment, according to the Labor Department.
If you don’t withhold upfront, most likely, you will need to send quarterly estimated tax payments to the IRS to avoid a big tax bill next spring. TurboTax has a W-4 withholding calculator that may be useful in helping you calculate your estimated salary, or you can opt to work with an accountant.
If you are unemployed at the moment and worried about how this will impact your taxes, Greene-Lewis says that the earned income tax credit (EITC) might be something worth looking into. The EITC provides between $538 and $6,660 in tax credits, depending on your income and the number of dependents you have. If you qualify, the tax credit can be used to offset what you owe on your total tax bill.
For instance, let’s say you owe $1,000 on your federal income taxes for 2020, but your earned income tax credit amounts to $1,500. You will get a refund of $500.