Given the delays with unemployment claims in Wisconsin, eventual payment of benefits is leading to folks receiving lump sum payments of $10,000, $15,000, or even $20,000 or more.
Payments that large will mean a federal and state income tax liability, IF you do not have state and federal taxes deducted automatically at the time benefits are paid — aka, tax withholding.
Note: Because benefit payment levels are generally low in Wisconsin, having taxes deducted from benefit payments has usually NOT been an issue. With the supplemental funding from the $600 PUC in spring and summer of 2020 and the $300 PUC in 2021 and because lump sum payments are including six to twelve months of benefits, the amounts being paid are now much, much larger than normal.
Keep in mind that income taxes are almost always paid on a calendar year basis. So, for income tax purposes what matters is in which year benefit payments are made. The weeks being claimed is what matters for unemployment, but is inconsequential for your income tax.
Note: A vital document everyone should have is a PDF of their benefit payment history. Instructions for getting that PDF document are available here. As noted in these instructions, follow them carefully. You should probably be getting a new PDF of your benefit payments every month.
2020 income taxes
If a large payment was made to you in 2020, the American Relief Plan allows waiver of the first $10,200 in unemployment benefits received on your federal income taxes.
But, in Wisconsin state income tax is still owed on all unemployment benefits received. As of yet, there is no waiver of state taxes owed on unemployment benefits received. Instructions for paying the taxes owed are here.
If you have already filed your 2020 federal income taxes before mid-March 2021 when the American Relief Plan was enacted, the IRS will automatically make the waiver correction on your federal tax return. So, there is no need to file an amended tax return to the IRS.
2021 income taxes
Income tax returns for the 2021 calendar year are not due until 2022. But, a big payment of unemployment benefits in 2021 of $10,000 or more will likely mean that you should be filing both federal and state estimated taxes on a quarterly basis to avoid penalties. These estimated tax payments are needed if federal and state income taxes are not automatically deducted from your unemployment benefits when those benefits are paid. Estimated taxes are due for earnings received:
- January thru March: estimated taxes postmarked or paid by April 15th
- April and May: estimated taxes postmarked or paid by June 15th
- June thru August: estimated taxes postmarked or paid by Sept. 15th
- September thru December: estimated taxes postmarked or paid by 18 January 2022 (but, to avoid calendar year confusion and issues, you should probably make this last payment before December 31st)
For example, if you receive a big payment of unemployment benefits in March 2021 without any federal or state income tax deductions, then you should probably file both a federal and state estimated tax payment for the first quarter of 2021 by April 15th.
If federal tax deductions were made from that benefit payment but no state deductions were made, then you only need to file a state estimated tax payment.
If state tax deductions were made from that benefit payment but no federal deductions were made, then you only need to file a federal estimated tax payment.
Obviously, the requirement to pay estimated taxes when there is no tax withholding also applies when those weekly benefit payments add up over time. With the addition of the $300 PUC until September 6th of this year, a person with a weekly benefit rate of $300 will be receiving $600 each week. Ten weeks of those payments will be $6000, and fifteen weeks will be $9,000. So, it will be a good idea to make an estimated tax payment for that amount where there is no tax withholding.
Even when back to work but at a reduced schedule, you will probably still be eligible for unemployment benefits, including the $300 PUC. So, these benefits will add up quickly, and tax withholding from your workplace wages will not be enough to cover the income tax liability.
In other words, if you are receiving unemployment benefits in 2021 and there is no federal and state tax withholding when those benefits are paid, you should consider filing quarterly estimated tax payments.
Here are the forms needed for filing 2021 estimated taxes:
- Federal ES-1
- State 1-ES
- A spreadsheet for calculating state and federal estimated taxes
Note: The spreadsheet, the information presented in this post, and the links to other websites and information is for your own personal use and is not intended as tax advice or guidance for your specific situation. Per IRS Circular 230 Disclosure requirements: To ensure compliance with requirements imposed by the IRS, any US federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter discussed herein.
The Department of Workforce Development itself has information about tax withholding and for turning tax withholding on or off. To avoid estimate tax payments in the future, make sure to turn tax withholding for state and federal income taxes on. For any unemployment benefit payments received without tax withholding, consider making the estimated tax payments described here.
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