SEATTLE - People are facing an unexpected and unwanted surprise this tax season when they find out they owe the government hundreds, or even thousands, of dollars in taxes on unemployment benefits.
This past year, many people felt the impacts of COVID-19. Job loss was high, and unemployment claims hit record numbers.
Many folks relied on unemployment benefits to get through the pandemic.
"It was huge. It was the equivalent of what we made in tips," said Nick Baker.
Baker and his wife work in the restaurant business. He says both of them were laid off or faced reduced hours throughout 2020.
With the help of unemployment benefits, they were able to make it through the year. However, within the last few weeks Baker says he learned they would have to pay for the help they got over the last several months.
"It just blind-sided us," he said. "This year we had to pay a little over $1,500 in taxes," Baker added.
He says he was looking toward his tax return to put money back into his pocket. This unforeseen cost to his family came as a surprise. Experts say this is a common situation this year.
"It’s like, ‘Oh what am I going to do now?'" said Forrest Waters.
Waters is an enrolled agent, or a federally recognized tax adviser. He owns FewTax.
He says this year he is hearing horror stories from people, like the Bakers, who owe hundreds or even thousands in taxes on unemployment benefits.
Waters says issues are coming from folks who did not sign up for taxes to be withheld from their unemployment benefits, or did not withhold enough of a percentage.
He says there are a lot of folks who signed up for unemployment this year who are not familiar with the process, and now they are paying for it, even if they can’t afford it.
"You have to file the tax return. Whatever you do, file the tax return," he said.
But Waters says there are options if you are short on cash.
He says if you don’t have the money to pay, you can work with the IRS to opt for a payment plan installment agreement where you pay small amounts over time.
He also says you can file with the IRS for Currently Not Collectable, which means you don’t have to pay right now, but face interest payments and penalty fees.
Waters also suggests holding off until taxes are due to file them, just in case any other options become available later on.
"All we’re doing is looking for opportunity to either find money, hope for some break from the government, maybe congress comes in and waives some penalties, gives us additional time; basically, it’s a wait and see what is going to happen," he said.
For folks who are looking for tax help, the United Way of King County is offering free assistance. For more information click here.