- 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…