Taxes on unemployment money coming due soon, surprising many

OAKLAND, Calif. - Many jobseekers who are collecting unemployment benefits may be hit with a nasty surprise come tax season. Those who have been collecting supplement payments may be unprepared for a tax bill on their benefits in April.

In California, unemployment benefits, including the supplemental $600 and $300 aid, are subject to a federal tax. Recipients have the option to withhold a flat 10% of their funds, but when unemployment insurance is not a livable income for a family in any state, the opt-in tax system presents an impossible quandary: pay for food, healthcare and housing now, and worry about taxes later, or risk going hungry, losing your housing or skipping medicine.

Many jobseekers across the state are confused about the tax opt-in system, and many more report that they simply can’t afford to put aside any money when they don’t have enough to begin with.

Janelle Yap of San Jose, who is unemployed but previously worked in customer service, said that she isn’t sure how long it will be before she can find a job. This uncertainty motivates her to take the full amount of unemployment money every week.

"I want every penny to be mine, and I worry about it later," she said.

What is she spending her $450 a week on? "Bills and rent, and just basic living necessities," she said. 

The extra $600 CARES Act supplement helped her immensely, but without it, the money she gets is "barely enough" to survive.

An unemployed Brentwood man, who did not want to use his name because he is embarrassed about his financial situation, said that he can’t afford to withhold taxes at the moment. 

"We've always been very responsible," he said. Although his wife remains employed as a nurse, his family’s income dropped from about $12,000 a month to $4,000.

He made "well over six figures" before the pandemic, but now needs every dollar of benefits to pay for food for him, his wife and two children.

Now, he feels that using the maximum available unemployment benefits for food, the electric bill and internet, is the prudent thing to do. His family needs more groceries than before the pandemic, as his children are at home, online, every day for school.

Having enough to eat has been a "difficulty." "That little bit of money is so vital to keeping the engine going," he said. 

Sean McSann of San Mateo, who is unemployed and previously worked in education technology, said that he had no idea that one needed to, or could, withhold taxes on benefits. For the first month he was on unemployment insurance, he took the full amount.

"I didn't think that unemployment was taxable," he said.

When he ran into an issue with his account, an EDD representative assisted him, and recommended he withhold taxes on benefits. He has ever since.

Clarence Baldwin Jr., a substitute teacher in San Bernardino, said that he’s still working part-time, but needs unemployment funds to provide for him and his son. Uncertainty about his situation, and how his students are faring financially, looms large in his mind.

"Yes, I do have taxes taken out--and I'm still worried about it," he said. "I'm nervous as hell to be perfectly honest with you."

Nora Hiller of Williams recommended withholding taxes on benefits to a young, unemployed man she has been mentoring. Hiller is unemployed herself, and told the young man that he may run into future financial trouble if he doesn't pay now.

"He refused," she said. She tried to communicate to him how very stressful and crippling debt can be--lessons she’s learned from overcoming financial hardship herself. But he would not budge.

For now, she elects to have taxes withheld from her benefits.

"I just don't want one more stress added to me," she said. "I know there are so many people that just could not take that extra $14 out of a check."

She said that she intimately understands how precarious finances can compromise one’s mental health. Although she is barely getting by--"letting her roots go gray"--she knows from experience that owing a large sum of tax money could be paralyzing. 

"I just know that that financial burden, it will blow my mind completely," she said. "I mean, it could be a tipping point. But there are people that need every single dime of that and more."

Elizabeth Pancotti, a policy advisor at Employ America, said there is no state where the average benefit is sufficient to cover the cost of living. 

"If you have a family with both parents on unemployment, it's nowhere near what you need to put a roof over your head, put food on the table, pay for child care expenses, or anything like that," she said. "Or medical expenses, given that you probably lost your employer sponsored health insurance."

With the $600 CARES Act supplement, many people were saved from falling into poverty, she said. And while she’s glad that the $300 unemployment supplement has been reinstated, she’s worried about how families will fare without it.

She said that if there is "wiggle room" for workers to save money for taxes right now, since benefits are topped off with the $300 supplement, that would be wise. Benefits won’t be supplemented in April, given the timing of the most recent bill, she noted.

Pancotti recognizes that this advice is unrealistic for many workers. "I'm not sure that's a great thing to tell families who had 30% of their pre-layoff wages for the last nine months," she said. 

Michael Bernick, a labor lawyer and the former director of the Employment Development Department, expressed a similar sentiment. 

"I would agree with them fully," Bernick says of the decision many have made to not withhold taxes, and use every dollar available to meet basic needs. 

He believes very few unemployment recipients know that they must put funds aside for taxes. And historically, he said that recipients seldom elect to withhold taxes.

"Even in better times, most people on unemployment insurance are on the margins," Bernick said. "And so every dollar means a lot. And of course, that's only intensified 100 times during the pandemic. So we don't have numbers yet on the number of people withholding during the pandemic, but my suspicion is very, very small."

Pancotti said that if there is a public accountant or tax preparer in your community, unemployed folks might want to meet with them to explore options for no-cost extensions or payment plans with the IRS.

"I think the operative mantra is stay alive," Bernick said. "And for whatever you need to do to survive, so I can't advise people--everyone has to make their own decision."

Caroline Hart is a writer and producer at KTVU. She covers unemployment, inequality and the economy. She can be reached at caroline.hart@foxtv.com.