Stimulus Checks Are Tax-Free But Unemployment Benefits Are Not

When the federal government goes big, in a hurry, it's predictable there will be some confusion as initiatives are rolled out and rules are announced and often revised.

That's certainly been true with the trillions of dollars being pumped into the economy to help businesses pay employees and rent through the Payroll Protection Act, to juice the economy and the stock market through expansion of the Federal Reserve's balance sheet, and to send CARES Act checks and enhanced unemployment benefits to individuals.

Certainly, the U.S. government seems to be doing its best to keep accountants and tax attorneys employed.

At least for individuals who don't operate a business, direct financial assistance has come in two forms that are fairly easy to understand: the $1,200 economic impact payments that about 160 million people have so far received, and the enhanced jobless benefits received by tens of millions.

Those who received a $1,200 CARES Act payment don't have to do anything. Those one-time economic impact payments are not taxable.

Workers who lost their jobs or were furloughed and received unemployment benefits, will need to pay attention so that they don't have an unpleasant surprise at tax time. That's because unemployment compensation is taxable, and millions of people are collecting more money through enhanced unemployment benefits than they were making at their jobs.

It may seem odd that people who may have remained employed don't have to pay tax on their $1,200 checks, while those who lost their jobs have to pay tax on unemployment benefits, but those are the rules.

The federal government threw the unemployed a lifeline, an extra $600 weekly, through July on top of regular unemployment benefits that states pay out. That's been crucial to helping people pay their bills, particularly in places like South Carolina where the normal maximum unemployment benefit is just $326.

The extra money has helped people pay their rent or mortgage, helping landlords and banks in addition to the unemployed. It's helped people buy groceries and medicine, make car payments, and even build up some savings for the lean days that may yet be ahead.

However, people who have been collecting unemployment need to be prepared for the tax bill they will eventually owe, particularly if they are getting more income from benefits that they received while working. Those filing for unemployment benefits in South Carolina had the option of having state and federal taxes withheld at 7 percent and 10 percent, respectively.

Those who are receiving benefits, and did not choose to have taxes withheld, can change their withholding option for future payments through the "my benefits" portal on the S.C. Department of Employment and Workforce's website.

Otherwise, they will likely owe the government when they file their state and federal returns in 2021. Another choice, for those who return to work this year, is to adjust their withholding in order to set aside the anticipated taxes on unemployment benefits.

If a person collected the maximum $926 in weekly unemployment and elected to have taxes withheld, the state would have held back $64.82 weekly for its share and $92.60 for federal taxes. If they didn't have that money withheld, those numbers are a guide to how much they need to set aside, or have withheld from paychecks, for every week they collected benefits.