Millions of Americans are now receiving unemployment compensation, and many of these would have never claimed this benefit before. The IRS has issued a reminder that this benefit is taxable and that people can have money withheld from the payments they receive now to avoid a bigger bill when they file their tax return for next year.
The law states that unemployment compensation is taxable, and therefore it must be declared on a 2020 federal income tax return. This rule also applies to any special employment compensation awarded as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which came in the spring.
Federal law allows you to withhold a flat rate of 10% of any benefit you receive to cover the tax you need. This withholding is voluntary, but bear in mind that the tax will need to be paid eventually.
If you decide to withhold some of your tax, you will need to fill out form W-4V. The form is a Voluntary Withholding Request, and it should be given directly to the agency that is paying the benefit, not to the IRS. If this agency has a different form for requesting a withholding, then this should be used instead.
If you do not want money withheld from the compensation, you can make estimated payments every quarter. This method can also be used if the withholding made does not cover all the tax that you owe. Payment for the first two quarters should have been made on July 15 and the third quarter payment is due on September 15. The final quarter will need to be paid by January 15, 2021.
It is recommended that taxpayers should check their withholding if they are receiving any of the following benefits.
The IRS has provided a Tax Withholding Estimator for people to use if they return to work before the end of the year. This can be used to make sure that enough tax is being taken out of your pay. The tool can be used by anyone that wants to avoid a tax bill when they file their returns.
If you have received any unemployment benefits, you will receive a form 1099-G Certain Government Payments from the agency that has administered the benefits. The amount of unemployment compensation received in 2020 will be listed in Box 1 and any federal income tax withheld in Box 4. This information will need to be reported on the 2020 tax return, along with your W-2 income.