As a consequence of the Coronavirus Pandemic, more than 25 million Americans have been collecting Unemployment Benefits. For numerous individuals this is the first time in their life that they have had to utilize these benefits. Countless unemployed workers are unaware of the taxing requirements on unemployment benefits. These benefits are completely taxable by the federal and state government as if it were ordinary income. Both the state unemployment benefit amounts as well as the additional $600 a week given through the CARES ACT for the federal coronavirus relief will be reported as part of your taxable income for 2020. An aggregate amount of the benefits you have received will be delivered to the IRS and you will be responsible to pay taxes on the income. Unemployment Compensation is typically generated onto a Form 1099-G, Certain Government Payments. A Form 1099-G is the Form that specifies the entire amount of compensation received and taxes withheld. A duplicate of this form will also be generated and mailed to taxpayers at the end of the 2020 calendar year.
Although taxpayer’s ordinary income has completely diminished or suffered a significant drop for the year, there is still a large possibility that you could end up with a tax bill. When you initially file an unemployment claim with your States organization for benefits, you should utilize the option to have a flat rate of 10% withheld from your unemployment benefit payments to cover your federal and state taxes. This is the standard flat-rate percentage given on the initial unemployment request application. Having taxes withheld from your unemployment compensation is completely voluntary and not something that the government will automatically do for you. It would be in your best interest to utilize the voluntary alternative of withholding taxes. This will make it easier for you in the future when your required to file a tax return and pay taxes on the income collected.
If you are reading this article and have already started receiving the unemployment benefits without any federal income tax withheld, then don’t panic! There is a Form W-4, Voluntary Withholding Request that can be obtained from the IRS. You can submit this form electronically or you can always bring it to your local unemployment agency from which your benefits are being paid from. The Internal Revenue Service requests that you do not transmit the form directly to them. You will ultimately want to double check with the state agency on which form to submit because the state may have one of their own. If this is the case, you will want to use their form to withhold taxes. Each form can be adjusted on a biweekly basis when you are submitting an unemployment claim. By submitting a Form W-4 you can take control of the federal and state income tax withholding for the unemployment benefits paid directly to you.
Although this option is easier said than done try to put aside funds from your direct unemployment benefits each time they are received. If you can take at least 10% of the money you received and shift it to a savings account, you can unconsciously prepare for a tax bill that may accrue when it’s time to file. Many Americans who have dependents can also utilize the various refundable tax credits when it’s time to file that will help reduce or even diminish the overall tax due on your account.
If you do not pay adequate tax on your benefits, then you will end up owing taxes. As acknowledged above, one way to forestall owing taxes is making sure to adjust your withholding correctly. Another alternative, that is more for Self employed individuals and business owners, would be to guarantee quarterly estimated tax deposits to the federal government. The payment for the first two quarters of 2020 was due on July 15, 2020. The Third quarter payment is due by September 15, 2020 and the fourth quarter payment is due by January 15, 2021. That schedule is for payments sent to the IRS. Each state will have a different requirement on how to make estimated tax payments based on their conditions established. You will have to investigate the Department of Revenue or Taxation in the state you are receiving benefits in.