4/11/2024 0 Comments Federal tax form for unemploymentAs a result, millions of workers likely did not withhold federal income taxes for what could be tens of thousands of dollars in UI income per worker in 2020. In addition, in the midst of a pandemic and recession fraught with new challenges and new expenses, many workers could not afford to take a 10 percent reduction in their UI benefits, given that UI benefits typically only replace approximately 40 percent of pre-layoff wages (and an even smaller share of wages plus benefits). 5 The 10 percent rate applies regardless of filing status (that is, whether single, married filing jointly or separately, head of household) or number of dependents.Īlthough the withholding option is, according to federal law, 6 supposed to be available for payments “ in the nature of unemployment compensation” no matter their sources, 7 some states did not offer workers receiving benefits through CARES Act programs the option to withhold taxes. Thus, states are required to offer withholding for federal income taxes to UI beneficiaries at a standard 10 percent rate that is, to allow recipients to elect to have the state set aside 10 percent of their UI benefits and transfer them to the IRS to pay for future tax liabilities. The fear of these large payments can discourage participation in benefits programs. 4 This policy choice hurts lower-earning households, who have more difficulty making large one-time tax payments. Unemployment insurance benefits are usually considered taxable income (more on this later). Some of these workers were able to find new jobs, but at the end of 2020, over 18 million American workers were still unemployed and claiming benefits, in addition to the nearly 5 million who had exhausted all benefits prior to the end of the year. As a result of the pandemic, state UI offices fielded over 1 million new UI claims every week for forty-six consecutive weeks. What Caused the Problem?Īpproximately 40 million Americans received an aggregate of over $580 billion in unemployment insurance (UI) benefits in 2020. Not only will this surprise tax bill hurt many workers who can’t afford it right now-there’s a strong legal argument that, according to current law these benefit payments should never have been taxed in the first place. 1 At a time when millions are unemployed, 2 when families continue to face food and home insecurity, 3 Congress and the Biden administration must act urgently to prevent these surprise tax bills, and to allow millions who have already paid tax on their 2020 benefits to receive a timely refund check. Mostly unnoticed in the negotiation, though, is that, thanks to a decision by the Trump Department of the Treasury earlier in the pandemic, many hard-hit families who received unemployment insurance benefits in 2020 are now facing unexpected tax bills that could run to the thousands of dollars per family. As we write, Congress and the Biden administration are debating the size of a new relief package needed to aid struggling households and right the economy.
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