A record number of Americans applied for unemployment compensation this year due to the COVID-19 outbreak. 

Lawmakers passed the CARES Act in March, which boosted unemployment benefits across the country and expanded eligibility for benefits. 

With many new terms and guidelines, taxpayers should prepare for the upcoming tax season to avoid unexpected bills on their tax returns. 

What taxpayers need to know 

“I’ve had taxpayers disagree and say they don’t think the unemployment benefits are taxable,” said Dr. Kerri Tassin, associate professor in the School of Accountancy at Missouri State University. “But they are.”  

The federal government taxes unemployment benefits as ordinary income, but Social Security and Medicare taxes are exempt.  

Except for a few states that do not have a state income tax, most states tax these benefits as well.  

Tassin noted that the stimulus checks awarded earlier this year will not be taxed. 

“However, the additional $600 per week in coronavirus relief will be taxable,” she added. 

Unemployment vs. workers’ compensation 

Unemployment and workers’ compensation are not the same thing. 

“Throughout the years, I’ve heard people get unemployment confused with workers’ compensation,” Tassin said. 

Workers’ compensation is something employees might receive if they’ve been hurt or gotten ill on the job. 

Unemployment benefits are available for people who are willing and ready to work, but cannot locate a paying job. 

“They are different circumstances with very different payments,” Tassin said. 

For example, a person who is out of work from contracting COVID-19 would receive a different type of payment than a person who was laid-off due to economic stress related to the pandemic. 

Knowing what you owe and how to pay it 

 If you received unemployment compensation during 2020, you should receive Form 1099-G in January from your state’s unemployment office. 

You can also determine if your compensation is taxable using the IRS’s Interactive Tax Assistant tool.  

If you are still receiving unemployment compensation, you can choose to have federal income tax withheld by submitting Form W-4V to your state’s unemployment office. 

This can help to avoid a surprise bill when tax season comes around. 

“For many taxpayers, that might be a very good idea,” Tassin said. “Alternatively, taxpayers can make what are called estimated tax payments, which is when they try to estimate what they believe they’ll owe in income tax and pay that ahead of time.” 

Estimated tax payments can be made using Form 1040-ES.  

All forms can be found on the IRS website.   

For more information, contact your state’s unemployment office.