What the Self-Employed Should Know About Taxes on Unemployment Benefits by Kevin McNally, JD

Posted on September 22, 2020 by Kevin McNally

Among the millions of American workers filing for unemployment compensation in the wake of the COVID-19 pandemic are self-employed individuals, independent contractors and part-time workers who otherwise would not qualify for these benefits. While the extension of unemployment assistance to these workers is good news, it is critical for out-of-work individuals to recognize that the IRS considers unemployment payments to be taxable income that they must report annually on their federal income tax return.

To avoid a surprise tax bill next year when filing your 2020 tax returns, you have two options: 1) voluntarily elect to have taxes withheld from your weekly unemployment checks or 2) make quarterly estimated tax payments to cover your unemployment tax liabilities.

Withholding Tax from Unemployment Pay 

In the same way that employers withhold taxes from employees’ paychecks, you may complete IRS Form W-4V, Voluntary Withholding Request, and send it to the agency paying your unemployment benefits to have a flat 10 percent withheld from your weekly unemployment checks to cover part or all of your federal tax liability. At a time when you may need every dollar of unemployment compensation you are entitled to receive, you should still consider having some portion of taxes withheld now rather than risking a potentially significant tax bill later on. This is especially important if you expect to be rehired or back to work growing your business before the end of this year. Not only will it help ensure your employer takes enough taxes from your pay, it will also help you qualify for tax credits and deductions that you may use to offset any increased earnings.

In January 2021, you should receive IRS Form 1099-G, Certain Government Payments (PDF), showing the amount of unemployment compensation you received during 2020 and any federal income tax withheld. You will need to include this information on the 2020 federal income tax returns you file in April 2021.

Making Quarterly Estimated Tax Payments 

If you do not choose to have taxes withheld from your unemployment benefits, or if you do not withhold enough taxes, you may instead make quarterly estimated tax payments directly to the IRS. The due dates for these payments are July 15, 2020, for the first and second quarter, and Sept. 15, 2020, and Jan. 15, 2021, for the third- and fourth-quarter payments, respectively.

Either way, you cannot escape the IRS when it comes to paying taxes on unemployment benefits. It makes sense to reach out to your tax advisor to determine which option makes the most sense for your situation, your short-term needs and your long-term goals.

About the Author: Kevin McNally, JD, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with high-net-worth families, private equity firms and real estate development businesses on a broad range of tax matters, including complex deal structuring.  He can be reached at the CPA firm’s Miami office at 305-379-7000 or at