SALT LAKE CITY — Thousands of Utahns who lost their jobs because of the pandemic were recipients of a record amount of unemployment compensation, plus a $600 weekly payment thanks to a federal government stimulus package.
While the extra money was certainly welcome by those who were left idle, soon they will be faced with the task of paying Uncle Sam his “fair share” come tax time.
As it happens, traditional unemployment compensation benefits are considered taxable income by the Internal Revenue Service and by most states, except for 15 — Alabama, Alaska, California, Florida, Montana, Nevada, New Hampshire, New Jersey, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Washington and Wyoming.
It is left to recipients to decide if they want to pay income taxes on the money when it’s initially distributed or quarterly when they can file their estimated personal taxes.
“When a person who applies for unemployment is determined eligible, they are given the option to have taxes withheld and what we do is a flat federal and state tax withholding for people who choose to have those taxes withheld,” said Kevin Burt, executive director of the Utah Office of Unemployment Insurance.
“In addition, people can choose to change that decision throughout their claim when they file their continued claim, so it’s not a difficult process to opt-in or opt-out.”
At the end of the year, the state sends IRS 1099 forms out to every claimant that includes the dollar amount in jobless benefits they received as well as the tax amount that has been withheld, he said. Individuals have to enter both of those pieces of information to be able to correctly calculate their income taxes.
“We try to educate people on that, but we certainly don’t force anyone to choose any (particular) option,” Burt said.
He noted that what made 2020 different than most other years was the additional weekly stimulus benefit that drew the attention of recipients and the general public.
“Normally with employment being in about a 40% to 50% replacement wage, this wasn’t alarming to individuals,” he said. “But when you tack on that $600-a-week stimulus payment, certainly, it can change your taxes.”
For that reason, the Department of Workforce Services is advising individuals to be aware of the unusual circumstance caused by the extra payments in order to avoid potential tax problems.
“We don’t know their financial circumstances. (But) we do want them to understand that it is taxable income, so they have to make that decision,” he said. “But it could be that maybe, ‘I was unemployed for two months in 2020, and I needed all those resources and now I have since returned to work and I can afford to pay those taxes.’
“But some individuals may take the more conservative route so that they don’t have to do that when they file their 2020 taxes,” Burt said.
The $600 payments were issued from April 4 through July 25, he said. And recently some claimants have been able to receive $300 additional payments starting last month as a result of the latest stimulus package.
“Any decisions that people have around unemployment, that should be something that they consider now as they received the stimulus $300 benefit in 2021 because the same thing will happen in 2022 when they file their 2021 taxes,” Burt said.