If you’ve been receiving unemployment benefits during the COVID-19 pandemic, you might be getting additional benefits under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Pandemic Unemployment Assistance (PUA) has made it possible for people who wouldn’t normally qualify for unemployment (such as independent contractors, self-employed people, some business owners and more) to receive benefits. In addition, the CARES Act provides for an additional $600 weekly “bonus” to those receiving unemployment, as a nod to the economic hardship this has caused.
If this is your first time receiving unemployment benefits, here’s what you need to know about them and their impact on your taxes. When it comes time to file your 2020 taxes, it should benefit you to seek out professional tax preparation services in Jamestown, ND.
Your benefits are taxable, including those under the CARES Act
Unfortunately, your benefits—even the new ones under the CARES Act—are taxable as income. That includes the $600 bonus. This means you need to include it in your 2020 tax return. It’s taxed at your ordinary income rate, so you’ll need to either save to pay the unemployment taxes or use one of the other withholding methods.
However, there’s some good news: the economic impact payment you may have received (up to $1,200) is not taxable. That money is technically considered a tax credit for your 2020 taxes, so you don’t need to worry about withholding anything from that payment. (If you’re confused, you’re not alone. Talk to your accountant about how to handle these benefits and credits so you don’t get an unpleasant surprise come tax time.)
There are a few ways to pay your unemployment taxes
If you’re not desperately struggling to get by, you might want to have taxes withheld from your unemployment income. This requires you to fill out a Voluntary Withholding Request (Form W-4V) with the IRS. It’s just like having taxes withheld from a normal paycheck—you won’t need to think about it after you file Form W-4V, and you won’t be hit with a huge surprise when Tax Day rolls around next year.
Another way to pay unemployment taxes is to make quarterly estimated tax payments. If you’re self-employed or an independent contractor, you’re probably familiar with this process. You can send quarterly estimated payments to the IRS by phone, via mail, online or even on the IRS2Go app.
Finally, you can pay your unemployment taxes in one lump sum when you file your 2020 taxes. Your state will send you a Form 1099-G, so you can calculate your tax liability as well as the rest of your gross yearly income. Note that this can be a gamble if you’re already struggling to get by—you might not be able to come up with the lump sum at tax time. However, the IRS is usually happy to work out a payment plan.
For comprehensive tax and accounting services in Jamestown, ND, reach out to Craig S. Hanson, CPA today. We offer free consultations and can help everyone from single filers to large business owners.