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2020 has been a unique year that has brought many taxpayers unprecedented challenges. Due to the Coronavirus pandemic, millions of American’s have received or are currently receiving unemployment compensation, many for the first time. The IRS reminds taxpayers that unemployment compensation is taxable.
People can have taxes withheld from this compensation now to help avoid owing taxes on this income when they file their income tax return next year.
By law, these benefits are taxable and must be reported on a federal income tax return for the tax year it was received. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security Act.
Federal law allows recipients to choose a flat 10% withholding from these benefits to cover part or all their tax liability. To do this, recipients should complete Form W-4V, Voluntary Withholding Request, and give it to the agency paying their benefits. Don’t send the form to the IRS. If the paying agency has its own withholding request form, use it instead.
Recipients who don’t choose voluntary withholding, or if the withholding isn’t enough, can make quarterly estimated tax payments. The payment for the first two quarters of 2020 was due on July 15. Third quarter is due September 15, 2020 and fourth quarter on January 15, 2021. Taxpayers can visit IRS.gov to view all payment options.
Recipients who return to work before the end of the year can use the IRS Tax Withholding Estimator to make sure the right amount of tax is taken out of their pay. This online tool is available only on IRS.gov, and it can help workers or pension recipients avoid or lessen year-end tax bills or can estimate a refund.
In January 2021, unemployment benefit recipients should receive a Form 1099-G, Certain Government Payments, from the agency paying their benefits. This form will show the amount of unemployment compensation received during 2020 and any federal income tax withheld. Taxpayers should report this information, along with other income, on their 2020 federal tax return.
If you have received unemployment compensation this year or if your tax situation has changed, this is a great time to do some year end tax planning. Contact us today to schedule your tax planning appointment!
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