With the pandemic impacting the economy to the extent it has for much of the year, millions of taxpayers found themselves collecting unemployment for the first time in their lives.
Although unemployment insurance (UI) is a government program helping taxpayers out of work (and includes the Pandemic Unemployment Assistance (PUA) many received in 2020), these payments received by taxpayers are not tax-free income but are subject to federal and state income taxes.
To help plan for the taxes owed on this income, taxpayers can voluntarily choose to have 10% of their periodic UI received withheld for federal income taxes. To set up withheld taxes, a taxpayer needs to provide a completed Form W-4 to the paying agency, instructing the payor to have the taxes withheld.
However, having 10% withheld for federal income taxes may not be enough withheld. If you are in a higher tax bracket (12%, 22%, 24% or higher), you may still be under withheld for federal taxes. In that case you should consider making quarterly estimated tax payments or having additional amounts withheld for taxes from your pay once employed again. And if you opted to have no taxes withheld from your unemployment benefits, then you should certainly consider paying quarterly estimated tax payments so that you don’t find yourself in too big of a tax hole next April.
Estimated tax payments can be submitted to the government by check with a payment voucher via mail, or payment can be submitted electronically online via the IRS website, link below: