I didn’t pay taxes on my unemployment benefits throughout 2020


  • I received unemployment in 2020 and didn’t have any tax withheld because I needed all the cash.
  • Now, I’m facing a huge tax bill — but I don’t regret it.
  • I can either pay the bill in full or use a payment plan, though the IRS charges 14% interest.
  • See Insider’s picks for the best tax software »

Late last month, like millions of Americans, I flung open my mailbox to find a 1099-G sitting atop a stack of junk mail. 

This new-to-me-form, for “recipients of certain government payments,” had a staggering figure in Box 1/Unemployment Compensation — and I owe income taxes on all of it. I made the decision way back in March not to have any income tax withheld on my unemployment benefits, and I’m certain I made the right choice (I had mouths to feed and a mortgage to pay after all). 

Still, I’m stumped on how to proceed — so I turned to a pair of experts for advice on how widespread this situation is, what my options are if I can’t pay my bill in full, and some tips for those collecting unemployment in 2021 to avoid making the same mistakes I did.

People collecting unemployment for the first time stumbled twice

“It’s a common problem,” Nadine Hawver, a tax preparer in western Massachusetts, assured me (cue nervous laughter here). She went on to explain the root of the issue: “Unemployment doesn’t meet all of our normal income, so most people are hesitant to have any [money withheld] because they need every penny to meet their obligations.” 

Phew. This answer had me breathing easier from the get-go; despite my flawed logic, I’m not the only one facing this present predicament. 

Hawver went on to acknowledge another very simple truth: “I think the hardest thing [in 2020] was many people were collecting unemployment for the very first time ever because of the pandemic,” which means the system was flooded with requests, and also flooded with individuals who have no experience navigating the system

Hawver says many of her clients stumbled twice — first, they were unaware that unemployment benefits would be taxable income; second, they didn’t know they could have taxes withheld. 

Right now, there are two options for paying taxes on unemployment income

As for the money I’m pretty sure I owe? Turns out my options are slim: pay the lump sum in one fell swoop, or get going with a payment plan. 

You can enroll in an installment agreement with the IRS online (you are looking for Form 9465); most states will simply issue a bill for the balance due and you can start making payments right away. Sound too good to be true? It is. 

“The disadvantage, of course, is that they charge interest,” Hawver reminded me, noting that —  in the case of the IRS — it’s currently a whopping 14%. In her experience, Hawver has seen an increase in a new trend: using a credit card to pay off tax debt. “It may be cheaper to pay off the IRS and pay [your debt] off through a credit card” if you have a 0% interest rate or a standard rate lower than 14%.

Next steps for my tax bill

Accountant Sue Baer, of Baer Tax Group in upstate New York, points to the fact that, on average, most people are not above a 10% tax bracket, which, when you factor in total income and standard deductions, may mean your tax situation isn’t all gloom and doom. 

“Don’t panic and think it’s a large number that is due,” Baer points out. “It may not be.” 

And Congress may ultimately pass legislation to ease the tax burden on unemployed Americans — potentially through the Coronavirus Unemployment Benefits Tax Relief Act — but that remains to be seen. I may wait till closer to the April 15 deadline to pay my tax bill to see what happens with this legislation.

After collecting unemployment for 24 weeks tax-free, I am (thankfully!) back to work. That said,  both Baer and Hawver’s advice to those who continue to collect is crystal clear: Visit your state’s unemployment website and elect to have taxes taken out if you’re still collecting UI. 

I know, I know, you’re already running short on cash to cover your bills — remember, that’s what got me in this very jam about which I’m writing! But in the big scheme of things, Hawver equates it to “having a little bit more in the pot when it comes time to do the taxes.”

This year, taxes are due in full by April 15. So get going! Do your taxes, see what the bottom line looks like, and go from there. What’s that old adage? Better the devil you know that the devil you don’t…

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