Myths about unemployment benefits and taxes abound, survey finds. Let’s fix that.

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In a Nutshell

Expanded unemployment benefits and stimulus payments are giving Americans financial help during the coronavirus crisis. But many are still confused about how unemployment benefits, stimulus payments and taxes work, a recent Credit Karma survey found.

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Since COVID-19 shut down huge swaths of the economy, millions of Americans have filed for unemployment benefits. But our recent survey finds that many don’t understand how those benefits could affect their taxes.

In May 2020, Credit Karma surveyed more than 1,000 adults who have been temporarily or permanently laid off or furloughed because of the pandemic and have been approved for unemployment benefits.

We found that respondents are using the majority of their unemployment benefits to keep a roof over their heads and to cover day-to-day expenses such as groceries and utilities. But many have misconceptions about how taxes, unemployment benefits and stimulus payments work. (Learn about our methodology.)

Key survey findings

More than a quarter of unemployed Americans surveyed (27%) incorrectly think unemployment benefits aren’t subject to tax.
A quarter of respondents (25%) think they can’t elect to have taxes withheld from their unemployment payments.
Of those surveyed, roughly half are confused about how stimulus payments work and incorrectly think they’ll have to pay income tax on the money next year.

Misconceptions about unemployment aid and taxes

Taxes can be confusing under any circumstances. Our survey indicates that many Americans may be even more mystified by how taxes work when receiving unemployment assistance.

The myth: Unemployment benefits are tax-free

A concerning 27% of survey respondents incorrectly think their unemployment money is tax-free. An optimistic 30% of respondents who think they won’t have to pay tax on unemployment assistance say they expect the government will waive taxes because of the coronavirus pandemic.

The reality: Unemployment money is taxable

Unemployment benefits are generally subject to federal income taxes — and possibly state tax if you live in a state that taxes individual income. So far, the federal government hasn’t moved to waive taxes on unemployment benefits related to COVID-19.

The myth: You can’t elect to get taxes withheld

A quarter of survey respondents incorrectly think you can’t elect to have taxes automatically withheld from unemployment payments. And 28% think they need to set money aside out of each check to pay taxes on unemployment benefits.

The reality: Yes, you can have taxes withheld from unemployment

States allow you to set up automatic withholding when you file for benefits. In fact, nearly half (49%) of respondents who know they have to pay taxes on their unemployment assistance are already having taxes automatically withheld.

The myth: The extra $600 in weekly unemployment aid is forever

The federal Coronavirus Aid, Relief and Economic Security Act, or CARES Act, provides an extra $600 per week to those approved for unemployment benefits during the pandemic. Nearly a quarter (23%) of respondents mistakenly say there’s no expiration date for those extra benefits.

The reality: Pandemic unemployment aid will run out

The CARES Act provides the extra money only until July 31, 2020. Depending on your state, you don’t have to report on your job search to continue getting it (something typically required under normal circumstances); 60% of respondents thought this was required.

There’s confusion around the tax implications of stimulus payments too

Survey respondents are also uncertain about the tax implications of another coronavirus relief measure — their stimulus payments.

The myth: Stimulus payments are taxable

Almost three-quarters (73%) of respondents say they’ve already received a stimulus payment. Among respondents receiving the stimulus payment, 41% incorrectly believe they’ll have to pay tax on their stimulus payment.

The reality: Stimulus payments aren’t taxable

Because your stimulus payment is actually an advance credit on your 2020 federal income taxes, the payment is not subject to tax. You’ll file your 2020 tax return in 2021. Nor will your payment amount reduce any refund you may be owed when you file your 2020 tax return.

The myth: You won’t have to report your stimulus payment

Americans are split evenly on knowing whether they’ll be required to report their payments on their 2020 tax returns.

The reality: You’ll have to report it

Since the payment is actually a tax credit, you’ll need to account for it on your tax return. But the IRS hasn’t yet explained how the credit will be recorded on tax returns.


Tips for managing taxes on unemployment benefits

If you’re receiving unemployment benefits and getting that extra $600 a week, keep in mind that the money can add up. Waiting until 2021 to pay any tax you owe on your unemployment aid may be a bad idea. Not only could you end up owing taxes, it’s possible you could face interest and penalties if you haven’t paid enough tax by the filing deadline.

Here are some tips and options to consider.

  • Have tax withheld from your unemployment payments. You can typically request this when you apply for benefits. If you’re already receiving benefits, reach out to your state’s unemployment agency to see about setting up automatic withholding.
  • You can also make quarterly estimated tax payments if you think you’ll owe tax when you file next year.
  • For answers about stimulus payments, check out the IRS Economic Impact Payment Information Center.
  • If the unemployment benefits you’re receiving help you feel financially stable (62% of respondents say it has), consider putting any extra money you have into savings. An encouraging 64% of survey respondents say they’ve been able to save some of their unemployment money.

Methodology

On behalf of Credit Karma, in May 2020 Qualtrics conducted a nationally representative online survey of 1,022 unemployed adults in the U.S. who are receiving unemployment benefits to better understand misconceptions around tax implications for unemployment benefits and stimulus payments.


About the author: Evelyn Pimplaskar is Credit Karma’s tax editor. With nearly 30 years of experience in media, marketing, public relations and journalism, Evelyn’s written about nearly everything – from newspaper accounts of salacious … Read more.