Don’t Forget to Withhold Taxes From Your Unemployment Benefits
As COVID-19 continues to wreak havoc on our lives, millions of Americans have found themselves applying for unemployment compensation. Many, however, don’t know that unemployment benefits are actually taxable by the federal government and that those who fail to withhold and pay the proper amount could find themselves in hot water with the IRS. To ensure that you don’t become the victim of an unwelcome tax time surprise, please reach out to our experienced Florida unfiled tax attorneys today..
Taxes on Unemployment Compensation
Although many taxpayers don’t realize it, unemployment benefits are taxable. This includes all special benefits authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted earlier this year. This means that those who are currently receiving compensation as a result of COVID-19-related job loss will be required to report those benefits on their 2020 federal tax return. Taxpayers who fail to fulfill this obligation will face penalties and interest charges that will continue to accrue until the liability is completely paid off or the taxpayer enters into an agreement with the IRS.
Withholding Taxes From Unemployment Benefits
One of the best ways that taxpayers can avoid a large penalty come tax season for failing to pay taxes on unemployment benefits, is to start withholding taxable amounts now. It’s important to note, however, that withholding is completely voluntary, as the IRS gives recipients of unemployment benefits the option to choose to withhold a flat ten percent from their benefits to cover part or all of their tax debt. To take advantage of this option, taxpayers should be sure to fill out a Voluntary Withholding Request, also known as Form W-4V and submit it to the proper agency.
Taxpayers who are receiving unemployment compensation should also be sure to check their withholding on benefits paid by the state from the Federal Unemployment Trust Fund, disability benefits received as a substitute for unemployment compensation, and unemployment assistance under the Disaster Relief and Emergency Assistance Act, all of which may require the submission of separate withholding forms.
Making Quarterly Estimated Tax Payments
Recipients who don’t choose to withhold from their benefits can instead make quarterly estimated tax payments. The payment for the first two quarters of this year was due on July 15th, while the third and fourth quarter payments are due on September 15th of this year and January 15, 2021 respectively.
Reporting Unemployment Compensation
In addition to withholding taxes from unemployment benefits, taxpayers who receive this type of compensation will need to report the amount of compensation they received in 2020, any federal income tax that was withheld, and their W-2 income on their 2020 federal tax return. Fortunately, the agency providing unemployment compensation should send a Form 1099-G to recipients providing information on these amounts.
Are You Collecting Unemployment Benefits?
To learn more about your withholding obligations, please call 386-490-9949 today and a member of our legal team will help you schedule a free one-on-one consultation with experienced tax return preparation attorney Ronald Cutler, P.A.