Filing Taxes on Unemployment
- May 29, 2020
- Posted by: email@example.com
- Category: Blog, IRS, Taxes, Uncategorized, Wage
The unemployment rate is already more than 14%, which means your tax situation is about to head for a bumpy ride. There are, of course, significant elements you should be aware of before you receive your unemployment compensation benefits.
Whether you are earning income or not, you might still have to file your tax return. However, the added perks of tax benefits make it worthwhile. Now, the nature of payments may come in the form of relief, but these benefits are still taxable and require reporting.
You will have to report all of your unemployment compensation in the current tax year. The idea is to figure out the different rules attached to different compensation plans. Here is a comprehensive look at the unemployment tax filing situation in the US:
What You Should do First
Your first course of action should be to get your hands on a Form 1099-G. It shows specific government payments that you receive and any withheld amount of taxes. You can, on the other hand, decide to have federal income tax unemployment benefits.
You can fill out Form W-4V as a voluntary withholding that would set up your withholding on top of your benefits via state unemployment. Although unemployment perks are taxable, you shouldn’t confuse these benefits as earned income.
Therefore, these unemployment benefits cannot qualify for any tax credit. The prerequisite clause dictates that a person have received a nominal amount of wages before the pandemic to become eligible for the compensation.
$600: Is it Taxable?
Deep down, you knew that the coronavirus stimulus package would come with at least a few strings attached. In simple terms, your $600 compensation does, in fact, is taxable. Remember, any amount you get from the federal government should is a taxable amount.
Also, don’t forget that the $600 is a cherry on top of other unemployment benefits for all the Americans. The weekly support of $600 for unemployed individuals is the work of the Federal Pandemic Unemployment Compensation plan that is essentially part of the new CARES Act.
Ironically, the unemployed individuals who will get this compensation understand that just because the amount is taxable doesn’t make it any less supportive. Besides, unemployment funds are never tax-free. You can use Form W-4V so long as you want your state authorities to withhold a portion of your wages for state and federal income taxes. However, paying quarterly income taxes can be quite complicated.
What about Stimulus Checks?
That’s right; your stimulus checks are not taxable. Think of your $1,200 non-taxable stimulus checks as a ray of sunshine. Fortunately, the same rules apply to the $500 compensation checks for qualified parents. As of now, the total amount is designated for each child.
Again, don’t confuse the nature of the stimulus checks as a loan. At no point in the future, are you required to pay this amount back. Also, these funds are not an advance on your annual tax refund. However, this amount is inherently a tax credit for the current and next year.
Therefore, don’t be presumptuous and make the mistake that it would reduce your due refund amount next year. Conversely, if you’re about to receive the standard tax refund, then you will get your due amount whether or not you are eligible to receive a stimulus check.
That said, things can get a little tricky because stimulus checks are predominantly tax credits that are attached to your previous tax return. So, it is highly possible that you may become eligible for the tax credit once you file your 2020 tax return in 2021.
Forms You Will Need
When the time comes to file your annual taxes, make sure to mention the correct unemployment income. Also, gather your 1099-G, W-2, 1040, and 1099. Though navigating between numerous forms can be quite tumultuous for inexperienced taxpayers.
It is the form you get from the unemployment agency of your state. It highlights the total benefits you receive and the withheld federal taxes.
You will have to file W-2 form so long as an employer employed you in the current tax year. And when you get unemployment benefits, your W-2 will mention those perks.
It informs unemployed individuals about the taxable amount of benefits. So, if you get supplemental unemployment perks via a paid private compensation plan, you will only need to pay the taxes on the benefits you got from the fund.
During the unemployment period, if you undertook responsibilities as a freelancer or contractor, you need to mention that taxable income on your 1099 Form. Usually, the company you performed services for sends you the 1099 form if the amount is more than $600.
Paperwork is Everything
You’d be surprised how many unemployed individuals usually don’t take care of the paperwork. Unemployment benefits, after all, are not dangling from a tree like fruit. In fact, you need to submit required forms with correct information to get through the process. You can even decide to file on quarterly-bases as per your total tax payments in the current year.
According to the IRS, unemployment individuals should pay at least 90% of their unpaid tax amount via estimated payments or withholdings. If your strategy is to wait until the storm calms down, then you’re in for another hit. Taxpayers who fail to make estimated payments may have to pay the penalty along with tax payment.
Usually, when your income drops throughout the tax year, you automatically become eligible for certain unemployment benefits that range between $529 and $6,557. However, as the economy takes constant hits and unemployment rate breaks new records, the federal government aims to offer revised unemployment benefits to survive the COVID-19 pandemic.
Also, the maximum number of unemployment benefits you can receive depends on whether you are married or single. Consequently, that status can change how you file your unemployment taxes. Filing jointly, for instance, have relatively different parameters as opposed to filing independently. However, with joint tax filing, you can claim more benefits.
Don’t Wait Until It’s Too Late
Your journey to plan and file your taxes starts now. When the TCJA (Tax Cuts and Jobs Act) came into the spotlight, there were losers and winners on both sides of the aisle. The stimulus plans for unemployment will go through the same process when it comes to taxes.
In fact, if people decide to withhold an amount to avoid taxes, the same people will be befuddled to find their owed money in taxes to the IRS once the chaos of pandemic lifts. Similarly, several individuals who saw a dramatic plunge in their income during 2020 will likely view the stimulus plan as a lottery. However, the successful eligibility to get a stimulus check depends on whether or not you file your taxes.
As more Americans file unemployment because of the raging pandemic, you will have to garner all the support you can muster in these times. Just remember, you are not alone, a push to the online filing system and ease in the economic shutdown is inevitable. Therefore, don’t drift on the path of confusion. Instead, keep an eye on all the new updates concerning unemployment benefits from the federal and state government.