Are you receiving unemployment benefits right now? Plan now or a surprise tax bill may be headed your way.
The coronavirus pandemic has caused millions of Americans to file for unemployment benefits over the past five months. Under the CARES Act that was passed back in March, individuals receiving state unemployment benefits had access to an additional $600 per week in Federal Pandemic Unemployment Compensation benefits. It’s important to recognize that unemployment benefits, including the $600 boost, are considered taxable income. While you don’t have to pay Social Security or Medicare taxes while receiving unemployment benefits, you do have to pay federal income taxes and state taxes. This tool from the IRS will help you determine if payments received for being unemployed are taxable.
Putting money away today is key. If you are receiving unemployment benefits and want to avoid a surprise tax bill come April 15, 2021, here are your options:
- Have taxes withheld from your unemployment benefits check. It’s important to note that the expanded unemployment benefits could lead to an unexpected and substantial liability come tax time. To request the withholding, you’ll need to complete form W-4V. Withholding can be changed on a biweekly basis as you recertify your unemployment claim. Unfortunately, you cannot choose how much is withheld; Federal income tax is withheld from unemployment benefits at a flat rate of 10%.
- If you’re receiving unemployment benefits now, but you plan to resume employment later this year, you can ask your employer to increase your withholding in order to recoup funds to pay your tax bill next year.
- Save part of your benefits checks to put toward taxes. Our recommendation would be to allocate approximately 10% of funds to a separate account for tax time.
- Send quarterly estimated tax payments to the IRS. You can use Form 1040-ES to figure estimated tax.
What about stimulus checks?
Good news! The $1,200 stimulus checks are not taxable, including the extra $500 eligible parents received for each child. The stimulus checks are not a loan or an advance on your tax refund for next year; it’s considered a 2020 tax credit for next year’s taxes and won’t reduce your refund due next year.
As always, don’t hesitate to reach out to any member of our team if you have any questions.