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Filing Taxes When Unemployed

Posted by admin on April 6, 2022
Last modified: April 6, 2022

If you aren’t earning income, there’s a very good chance you can skip filing taxes when unemployed and for filing tax returns.

However, there are exceptions to this rule—and it’s worth trying out the IRS Help. In December 2020, the IRS provided guidance to help taxpayers better understand what types of income may be taxable when their form W-2 is not issued because they have lost their job or are not working. In May 2021, the IRS provided guidance on how to amend a prior tax year return (filed before the end of 2020) for those individuals whose form W-2 is not issued because it was the first time filing taxes they were unemployed.

If you want more information about how COVID-19 impacts your taxes, PriorTax tax experts can help you navigate these complex tax laws, including both current year and prior year tax filings.

filing tax when unemployed
filing tax when unemployed

How to Filing Taxes When Unemployed

The IRS published guidance in December 2020 on how to file taxes if your form W-2 is missing because you have lost your job or have been laid off due to COVID-19 or by other circumstances. In May 2021, the IRS released further guidance on how individuals filing taxes when unemployed for the first time without a form W-2 should amend their previous year returns in cases where it was the first time they were unemployed. The complexity of this rule and its multiple elements shows why tax preparation services are gaining popularity and are growing quickly in market share and usage as individuals prepare their taxes. Reach out to the PriorTax support team, and our tax experts will help you navigate the process of filing taxes.

Just as there are income thresholds for declaring unemployment, there are tax thresholds for self-employment. So for example, if you are unemployed but receiving Social Security benefits, you would still need to file a tax return. You don’t have to pay Social Security and Medicare taxes on unemployment benefits, but you must report them as income on your tax return.

Federal Tax for Filing Taxes When unemployed

In addition to paying taxes on unemployment benefits, if you worked part of the year before you lost your job, you may also be liable to pay federal income tax on that wage. Whether you owe additional tax on this wage will depend on the choice you made on your W-4 form and whether your former employer withheld sufficient federal income tax (and state income tax, if applicable) from the payroll. The amount you pay will depend on your tax bracket and your taxable income.

Depending on the amount of your unemployment benefits and your other sources of income, you may choose to make estimated quarterly payments and withholding if your total withholding is not enough to cover the income tax you owe. Another option is to pre-estimate the quarterly payment of any taxes you think you owe your benefits. Then, you can estimate your taxes and estimate payments on a quarterly basis to increase your chances of getting an unemployment tax refund or at least reduce the risk of having to pay by April 15.

Filing Taxes When Unemployed for Unemployment Benefits

If you qualify for unemployment benefits during the tax year, that income will also be part of your unemployment tax refund. The total amount of income you receive, including unemployment benefits and your tax return status, will determine whether you need to file a tax return. If you’re filing an unemployed tax return this year, your family’s income will come into play.

If you earned or received income during the calendar year, you will most likely need to file a tax return. There are some exceptions, such as those with income below the gross income threshold, but in most cases, yes, you must file a tax return. You may also have to pay additional tax on the income you earn if you do not withhold enough tax.

When you receive wages from work, you pay taxes because you withhold wages. Employers generally withhold federal and state taxes from wages based on how much you earned and the information you provided on Form(s) W-4.

It is possible that you should pay more taxes in addition to your unemployment benefits if wages for work or jobs worked have not been sufficiently deducted from each paycheck in accordance with your choice in W4. In the case you have been working at a higher salary for most of the year, you will probably have to pay taxes. If you haven’t paid enough taxes, you may end up paying tax when you file your return. If you do not pay within a year, the IRS expects you to pay the tax you owe in full by the filing date, and you may face a penalty for non-payment.

Timeline for Filing Taxes When Unemployed

You have until January 15 to pay your estimated tax payments on all benefits you received between September and December of the previous financial year. If you paid any state or federal income tax on unemployment benefits you received in 2020, you might be eligible for a refund. For these states, you are out of luck; you owed state income tax on your unemployment benefit, and you are not getting a refund of the state income tax you paid. If you live in one of these states and filed after a Congressional decision and erroneously excluded unemployment benefits from income, please check if you are required to file an amended state tax return and pay more state taxes.

Withholding Tax From Paycheck

You may be eligible to withhold income tax from your unemployment benefit, so you don’t have to pay the total amount when you file your tax return, but it won’t happen automatically. Can choose to withhold income tax from unemployment benefits, if necessary, to avoid unpleasant surprises when you file your return next year. If you also pay your taxes quarterly on your own instead of getting them from every unemployment benefit. Withholding federal taxes means that a fixed 10 percent of your unemployment benefits will need to pay federal taxes, similar to a withholding tax on a regular paycheck.

As an employee, a portion of your salary in many cases automatically deducted from federal income tax and Social Security taxes. When your employer withholds taxes from your paycheck, the payroll department calculates your withholding tax as if you were earning the same amount all year round. The payout means you must include the benefit on your tax return, even though the money was technically for unemployment in 2020. When you return your unemployment benefits next year, you will not be able to receive a tax credit unless next year’s repayment is more than $3,000.

In case you paid more than $3,000 in unemployment benefits in 2020 that you included in your gross income the previous year, see Pubs Reimbursement. If you are among the record holders, it is important to know that you will likely have to pay taxes in 2021 on the unemployment benefits you received in 2020. Unlike stimulus checks, on which you don’t have to pay taxes.. unemployment benefits are taxable income and must be reported on your 2021 return.

While the U.S. changed that rule in 2020 in response to COVID-19, those who increased their unemployment income in 2021 should expect to pay all taxes for these benefits. In the fiscal year 2020 (2021 tax return), if your Adjusted Gross Income (AGI) is less than $150,000 in the fiscal year 2020.

Free Tax Advice from the Tax Experts

Please reach out to our Tax Experts for free advice. In addition, we provide free support for simple and easy filing taxes when unemployed.