HELENA — A record number of Americans have received unemployment benefits as a result of the COVID-19 pandemic.
However, the IRS wants people to know those benefits are taxable income.
“Under federal law unemployment benefits are taxable under your federal tax return next spring,” said Montana Department of Revenue PIO Sanjay Talwani. “So if you’ve been getting unemployment insurance it may be smart to figure out if you have to pay estimated taxes to the federal government, to the IRS so you don’t get a big surprise in April.”
Taxable benefits include any of the special unemployment compensation authorized under the CARES Act.
For thousands of Montanans, the COVID-19 pandemic is the first time they’ve been a recipient of unemployment benefits.
Many employers automatically take taxes out of a paycheck, but people have to opt in to having a voluntary tax withholding for unemployment.
Regular unemployment insurance claimants in Montana can have their federal income tax withheld by the Montana Department of labor and Industry (DLI) through their MontanaWorks account. A “Tax Withholding” tile is available on the dashboard. From there, they have the choice to select “I want federal income tax withheld from my unemployment compensation at a rate of 10% each payment.”
Withholding is not an option for Pandemic Unemployment Assistance, which covers self-employed individuals, who would usually make a quarterly estimated tax payment.
The $400 weekly benefit from the Lost Wages Assistance program which ran in August and September is also not available for withholding.
Unemployment benefits are not taxed on a state level in Montana, but the Montana Department of Revenue says it’s always good to be aware of any tax liabilities they may have.
“Anything people can do now to set aside money or just be aware that they may have to pay more taxes than they expected later, and somehow prepare for that if they can,” said Talwani.
Not having taxes withheld or making quarterly payments can be a significant tax liability.
Depending on the person’s income and how long they’ve been on unemployment, come April they could owe a couple dollars or a couple thousand.
In January, claimants will receive an IRS 1099-G form from DLI. It will show the amount of unemployment compensation received during 2020 and, if applicable, any federal income tax withheld. DLI encourages claimants to verify that your address on file is correct, so that they receive their 1099-G promptly.
For regular Unemployment Insurance, a claimant will have the option of downloading the 1099-G from their MontanaWorks account. 1099-Gs from 2019 or earlier are not available. Pandemic Unemployment Assistance claimants who have opted for electronic responses will receive their 1099-G by email, along with downloading instructions.
DLI doesn’t provide specific tax advice and recommends that those with additional questions concerning their tax situation consult a tax advisor. DLI does have a Taxability of Benefits page with more information and answers to frequently asked questions.