Unemployment Tax Consequences

Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. Of the 18.1 million unemployed people in America in June of 2020, 11.4 million of them were unable to work due to businesses shutting down because of the Coronavirus (COVID-19). That’s a shocking 63% of unemployed people, according to the Bureau of Labor Statistics. The American government released the CARES act on March 27th, 2020, which in turn, started the Federal Pandemic Unemployment Compensation (FPUC) and other unemployment benefit programs. The FPUC provides unemployed persons $600 per week in federal assistance in addition to other unemployment insurance programs.

With the FPUC in place, Americans must also keep in mind the tax consequences that accompany this assistance. Unemployment benefits are considered taxable income. This means the FPUC is subject to 10% federal withholding tax.

In Tennessee, the taxable rate of the unemployment benefits for employers is based on the Tennessee Unemployment Insurance Trust Fund (TUITF) balance. On March 1, 2020, the balance of the TUITF totaled $1.3 billion. Employers can visit TN.gov for tables that determine the rate that they must pay based on the TUITF balance. However, only the first $7,000 of wages paid to each employee by their employer in each calendar year is taxable. It should also be noted that Tennessee does not have an income tax. However, in Georgia, the unemployment benefits are taxed at a 6% rate, according to the Georgia Department of Labor.

In the long run, if citizens did not elect to have federal taxes taken out of their unemployment checks, they could have a big surprise waiting for them when they file their tax returns in 2021. If you need more information or have any questions, please contact HHM CPAs or your trusted tax advisor to walk you through the challenges and questions that could arise from unemployment benefits.

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