Millions of Americans have lost work this year and are collecting unemployment benefits. However, many people are unaware that the money you are collecting from unemployment is considered income and is taxable. Federal income tax is always owed on unemployment benefits. To avoid a surprise tax bill during tax season, be sure to withhold taxes or pay estimated taxes ahead of time. Here are some helpful tips to ensure that you don’t have to face an unexpected hit on your benefits later. 
#1: Have taxes withheld automatically.
If you are applying for unemployment benefits through the state, ask to have 10% covered from the payments to cover federal income tax. If you have already filed for benefits and did not request taxes to be withheld, you can fill out an IRS Form W-4V Voluntary Withholding Request to change your withholding amount.
#2: Plan to pay quarterly taxes.
If you don’t want to have income tax withheld from your check, you can elect for quarterly tax payments instead. This is usually a good option for self-employed or small business owners. If you are considered self-employed, there are some home office deductions that can be made too.
#3: Save wherever possible.
Losing a job is incredibly stressful and it forces most people to reevaluate their spending and cut back wherever possible. After doing this, also consider if you can put aside a portion of your unemployment benefits into a savings account. Having this little bit of extra money set aside in case things get even worse could be helpful later down the road.
#4: Know the details.
Federal income tax is always owed on unemployment benefits. However, state tax may not be owed, depending on the state you live in. In addition, unemployment is not subject to payroll taxes, which includes Social Security and Medicare which is normally withheld from paychecks. In addition, if you are being required to work from home, know that employee home office expenses are not deductible, unless you are considered self-employed.
If you are concerned about managing the details of these taxes, our team at HomeWork Solutions can help answer your questions. Contact us today to talk to an experienced payroll and tax specialist.