COVID-19 has caused millions of Americans to seek unemployment compensation, and some are receiving it for the first time. Just like any other type of income, unemployment benefits are subject to taxes—including unemployment compensation received as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Below is a brief guide to help you make sure you’re staying on top of paying the taxes you owe.
If you fill out Form W-4V and submit it to the payer of your benefits, you can choose to have 10% withheld to go towards your tax liability. Another option is to forego withholding and instead make quarterly estimated tax payments, with the payments for the first two quarters due on July 15th, the third quarter due on September 15th of 2020, and the fourth quarter on January 15th of 2021.
If at any point you’re able to go back to work, you’ll have to double check to ensure you’re having the right amount of tax taken out of your paycheck. The official IRS website offers information and online tools to help you determine the correct withholding amount.
The following are payments you should keep an eye on for tax purposes:
- Any unemployment assistance from the Disaster Relief and Emergency Assistance Act of 1974 or the Airline Deregulation Act of 1978.
- Any unemployment compensation paid by the state or any disability benefits paid in place of unemployment compensation.
- Lastly, railroad unemployment compensation benefits or trade readjustment allowances under the Trade Act of 1974.
If you are receiving any of these, consider checking your withholding or making estimated tax payments to avoid owing money on your next tax return.
In early 2021, you’ll receive Form 1099-G, which serves as a record of your unemployment benefits. Be sure to keep this with your other important tax documents, as you will need this information when you file.
These are uncertain times, but we are here to help you make the best decisions you can for your future financial well-being. If you have any questions, please contact us.
Ryder & Company is located in West Lawn, PA and offers a variety of accounting services, part-time CFO services, payroll preparation, and much more! We also offer tax preparation for individuals, as well as businesses and nonprofit entities. We assist many individuals and businesses in and around Wyomissing, Exeter, and Reading.