Home Business How being unemployed in 2020 could lead to a surprise tax bill

How being unemployed in 2020 could lead to a surprise tax bill

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Many jobless workers are about to find out they could owe federal and state taxes on their 2020 unemployment income.

The news might be particularly unexpected for independent contractors and self-employed people who normally aren’t eligible for state benefits, but may have received Pandemic Unemployment Assistance through the CARES Act.

“People who didn’t have any taxes withheld from those unemployment payments are going to be in for a surprise,” said Nayo Carter-Gray, enrolled agent and founder of 1st Step Accounting in Towson, Maryland.

Failure to withhold enough taxes could result in smaller refunds or taxes owed this spring.

Differences in state and federal treatment

Uncle Sam isn’t the only entity seeking a slice of your unemployment income. Most states will tax these benefits, too.

A handful of states — Alabama, California, Montana, New Jersey, Pennsylvania and Virginia — don’t tax these payments. Indiana and Wisconsin offer a partial exclusion of unemployment income, according to Andy Phillips, director at the Tax Institute at H&R Block.

“Some states have withholding, and others require it in order to alleviate surprises when tax time comes around,” said Jared Walczak, vice president of state projects at the Tax Foundation.

Though it’s too late to head off the tax liability you might owe for 2020, individuals who wrap up their returns early can at least plan to pay the amount owed by April 15 — the due date for tax returns and liabilities owed.

“You don’t have to make a payment until April 15, but it’s better to know in late January or early February that you have to come up with the dollar amount by then,” said Phillips of the Tax Institute at H&R Block.

Unemployment and tax credits