UNEMPLOYMENT BENEFITS ARE TAXABLE INCOME- DID YOU KNOW?
Due to the economic impact of the COVID-19 (coronavirus) pandemic, individuals may have had to file for Unemployment Insurance (UI) benefits for the first time. These benefits include the federal Pandemic Unemployment Assistance (PUA) program created under the CARES Act, which provides an additional $600 per week to many UI benefits recipients. For individuals receiving UI payments in 2020, it is important to understand the tax treatment of those benefits.
Both state and federal unemployment benefits payments are generally taxed as ordinary income by the IRS. As is the case with most regular income sources, recipients of these benefits are required to make tax payments throughout the year.
One way that taxpayers can meet this requirement is to request that tax be withheld from their UI payments, which can be done in most states by filing Form W-4V with the state’s unemployment benefits office.
If no tax is withheld from their UI payments, taxpayers may need to make quarterly estimated tax payments in order to avoid a large tax bill next spring, which could include penalties and interest charges.
A tax professional can help UI payment recipients determine whether estimated payments are needed, and how much to pay. The estimated tax payment deadline for the first two quarters of 2020 was July 15, but if an individual missed that deadline, penalties can still be minimized by making a payment as soon as possible.
Even if tax is withheld from UI payments, the amount withheld may be incorrect if a person’s benefit amount differs from their salary while working. To avoid an unpleasant tax surprise next spring, taxpayers can use the IRS Withholding Estimator tool (link below) to calculate the appropriate withholding amount, and file an updated Form W-4V to request additional withholding if necessary.
UI benefits recipients should also do a second checkup with the Withholding Estimator after returning to work, to ensure that their paycheck withholding is accurate going forward.
RTW Xxact is an expert in tax preparation, please call us for assistance in determining your estimated payments.
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IRS Withholding Estimator tool: https://www.irs.gov/individuals/tax-withholding-estimator