Unemployment Insurance Benefits

Lawmakers responded to the unprecedented increase in unemployment in 2020 with large increases in the payment of unemployment insurance (UI) benefits. The UI benefits helped support American incomes through the year and are considered taxable income.

To avoid an unexpected tax bill when filing their taxes, taxpayers would have needed to correctly withhold taxes from their UI benefits. For federal income taxes, a taxpayer can opt into a 10 percent withholding rate, but it is not required. Taxpayers may additionally remit quarterly estimated taxes throughout the year. Many taxpayers likely have not properly withheld or saved tax owed on UI benefits, which may create an unexpected tax liability when they file for the 2020 tax year.

To provide tax relief for unemployed workers, the ARPA excluded the first $10,200 in unemployment benefits for filers earning less than $150,000 per year. The IRS will provide guidance on this exclusion for filers who have already filed their tax return and received unemployment benefits; they may not need to submit an amended return if the IRS automatically calculates the proper tax owed and sends out a tax refund if necessary.

According to the U.S. Department of Labor, about $6.4 billion in unemployment insurance benefits were paid in the fourth quarter of 2019. By the second quarter of 2020, this jumped to $64.2 billion, and the third quarter of 2020 saw $48.7 billion in UI benefits paid. The higher UI benefit payments follow the rise in unemployment from 3.5 percent in February 2020 to a peak of 14.8 percent in April 2020. The unemployment rate remains elevated, at about 6.7 percent in December.