In 2020, we were abruptly forced to adjust to stay-at-home orders, quarantine, and the shuttering of businesses in efforts to quell the spread of the coronavirus. But while we made efforts to flatten the curve, the unemployment rates surged to historically unprecedented levels. These levels peaked in April and closed the year out at an elevated 6.7% in December.
Naturally, many of us relied on the support of various assistance programs to keep us afloat. Now that it’s time to report our incomes on our tax returns, it’s important to understand which pandemic assistance funds are considered taxable income and which programs don’t need to be reported to the IRS.
Unemployment Insurance Benefit (UI)
The coronavirus devastated the economy and made it necessary for millions of newly jobless Americans to seek assistance from their Unemployment Insurance Benefit. For many, it was the first time tapping into unemployment. And, in times of crisis, paying our bills and keeping a roof over our families’ heads becomes more important than understanding the future tax burden that awaits.
Federal Taxes for UI
For anyone who collected unemployment, that amount will absolutely be taxed by the federal government. By law, any amount of unemployment benefit collected must be reported on your 2020 federal income tax return. You can expect the amount of unemployment received to be taxed as part of your regular income.
Tax filers should have had the option throughout the year to have 10% automatically withheld from unemployment disbursements to cover the tax owed in part or in full. If you cant find automatic withholding through the unemployment benefit payer agency, use IRS form W-4V Voluntary Withholding Request and submit it to your unemployment benefit payer.
State Taxes for UI
When it comes to state taxes, the tax liability rules on unemployment are less clear-cut. Most states fall in line with the federal policy and tax unemployment benefits as income. But if you live in California, New Jersey, Pennsylvania, or Virginia, you’ll get to keep every quarter of the unemployment benefit received. These states fully exempt UI benefits from your taxes.
If you live in one of the states that have no income tax, you’ll not have to pay taxes on unemployment either. These no-income-tax states include Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee.
Still, there are more states that will partially exempt the taxation of unemployment benefits. Make sure to check with your state’s department of labor for the latest tax guidelines.
You’ll receive a 1099-G form from the agency that deposited your unemployment. This form will include the amount of unemployment disbursed (Box 1) as well as the amount withheld for taxes (Box 4), if any. Hang onto this form and input the information into both your federal taxes and state taxes, if applicable.
Pandemic Unemployment Assistance (PUA)
Wait, I thought we covered unemployment in the last section. Well, we did partially. Pandemic Unemployment Assistance differs from typical unemployment compensation insofar as who qualifies. You can qualify for PUA payments and not qualify for unemployment. Many Americans needed a financial safety net even if they did not entirely lose their jobs, but still lost wages, particularly freelancers, 1099-contractors, and gig workers.
If your ability to make your regular income took a hit due to COVID-19, you may have qualified for PUA. If you received any PUA payments, though, there will be taxes to pay on this amount.
Federal and State Taxes for PUA
The IRS stays the course and continues to tax any, special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This includes your PUA payments, which will be taxed as ordinary income.
For your state taxes, the PUA amount you received should be lumped in with other taxable assistance on the IRS Form 1099-G. Again, whether you pay state taxes on this amount will depend on whether your state taxes unemployment and regular income. Information about your state’s tax policies can be found on their respective department of labor websites.
Federal Pandemic Unemployment Compensation (FPUC)
The FPUC is likely better remembered as the extra $600 that certain qualifiers received weekly until the end of July 2020. This program was available to people who qualified for UI or PUA.
More recently, FPUC has been extended until March 2021 for $300 for those who qualify.
Federal and State Taxes for FPUC
Since the FPUC is part of the $2 trillion stimulus package passed by the CARES Act, it falls under federal taxation, according to the IRS. If you received these federal benefits without any automatic withholding, expect to treat the amount received as part of your regular income when calculating taxes owed.
The sum of the $600 weekly payments will be lumped into the total taxable aid benefit received in 2020 on your 1099-G form. Include this amount when filing your state taxes. If you have had taxes withheld in part or in full, don’t forget to include that when you file!
Pandemic Emergency Unemployment Compensation (PEUC)
The PEUC was also brought into existence by the CARES Act, along with FPUC and PUA. As coronavirus continued to affect our economy and livelihoods, an extension of federal relief benefits became a necessity for many. For those who exhausted their benefits, the PEUC allowed states to provide an additional 13 weeks of federally funded assistance.
For 2021, the PEUC has been revived from its December 31, 2020 expiration date and is currently available until March 14, 2021. Initially, if your employment was affected by the COVID-19 pandemic, you could only collect benefits for 13 weeks. The PEUC has extended that time frame to a total of 24 weeks.
Since the PEUC is essentially an extension of existing benefits, you should first identify the type of benefit you are extending to understand how it will be treated at tax time. Don’t forget to check your state’s guidelines on unemployment benefits, as each state may vary when it comes to eligibility and the amount of time unemployment funds may be received.
Paycheck Protection Program (PPP)
Even though the first round of PPP loans was capped at $10 million per borrower, these funds weren’t just for large, big-budget corporations. Qualifying sole proprietors, freelancers, and contractors also received funding from the PPP in 2020, a portion of which is forgivable.
Tax Treatment for PPP Loans
The good news is, that any forgiven PPP funds received in 2020 are not taxed at the federal level. Instead, this loan is treated as a tax credit and won’t be taxed as part of your business income. Beyond the benefit of being excluded from income, the PPP comes with another perk for borrowers who used the funds for certain business expenses.
Usually, business owners take advantage of the business expense deduction come tax time. Throughout 2020, rumors abounded that any expenses paid for with a forgiven PPP loan could no longer be deducted. This would have resulted in a higher taxable income for business owners. But with the Consolidated Appropriations Act, 2021 (CAA) that was signed by former President Trump in the last days of 2020, business owners and PPP borrowers were spared.
The U.S. Small Business Administration clarifies that the act, provides for the full deductibility of ordinary and necessary business expenses that were paid with a forgiven or forgivable PPP loan. This means that the loan does not count as taxable income, and any business expenses that would normally qualify for a deduction can still be deducted on 2020 taxes.
If you haven’t already, make sure to check your eligibility for PPP loan forgiveness.
Stimulus Checks ($1,200)
In April 2020, the first stimulus checks were sent out for a one-time payment of up to $1,200 per person, depending on income levels, and $500 for eligible dependents less than 16 years in age.
Are Stimulus Checks Taxed?
Everyone who received these payments can rest easy while they file with the IRS. Stimulus checks are not part of your gross income, and, therefore, will not be taxed. Because the stimulus checks are not considered part of your tax liability, these amounts should not be incorporated into the unemployment compensation amount on Form 1099-G.
Pandemic Benefit Taxation Break Down
|Unemployment Insurance||Yes — as ordinary income|
|Pandemic Unemployment Assistance||Yes — as ordinary income|
|Federal Pandemic Unemployment Compensation||Yes — as ordinary income|
|Paycheck Protection Program (forgiven)||No — tax-free|
|Stimulus Checks||No — tax-free|
Additional Tax Considerations for Pandemic Benefit Programs
Higher Tax Brackets
Be aware that the total aid disbursement on the 1099-G form may be enough income to bump your household into a higher tax bracket, increasing your tax liability. Check the 2020 tax brackets to calculate exactly where you’ll land.
Filing Dates Have Changed
Taxpayers are adapting to new tax codes and regulations that came with coronavirus financial assistance, and we’re not alone. The IRS also needs time to adjust its systems and processes for the new tax code implemented by Congress in the last year. Normally, early tax filers can get the task done in January. In 2021, the earliest file date has been moved to February 12. Keep in mind, the April 15 tax deadline has not been moved as of yet.
It’s Not Too Late to Enroll in Withholding
Clearly, as we face soaring coronavirus cases and a new roll-out of lockdowns, were not out of the woods yet. That also means there will be new and extended forms of coronavirus financial relief, such as the CAA. If you have not already enrolled in tax withholding from unemployment and taxable pandemic assistance, now is the time. You may lessen your burden at tax time next year by submitting Form W-4V to the agency that issues your monetary benefit.
Sick, laid-off, or quarantined for various reasons, the coronavirus kept many of us from collecting our regular income in 2020. As these pandemic assistance benefit programs are born, we’re all learning the regulations and tax code on the fly. Pay close attention to any assistance you received this year and its taxation. No one needs the added stress of an IRS audit due to a failure to accurately report the correct benefit amount after the turbulence of 2020.
Due to the extraordinary circumstances of the last year, you may find your filing process more complicated than ever before. If the process begins to exceed your tax know-how or your self-filing comfort level, this may be the year to turn to a professional filer to ensure your tax return is free from any surprises from the IRS. TurboTax is an excellent option if you’re looking for professional tax guidance. You can read more about how they can help you in our TurboTax Review.