Did you know that unemployment compensation is taxable? If you received unemployment benefits this year, then it is reportable on your 2020 Federal income tax return. This includes special unemployment compensation granted under the CARES Act earlier this year. To learn more about how unemployment is taxable, keep reading.
When necessary steps are not taken to correct your tax payments and withholdings, you could be subject to penalties and interest when you file your 2020 tax return. Luckily, there is still time to take action! Here are two steps that you can take to ensure that you’re prepared for the upcoming tax season:
If you are still receiving unemployment benefits, you can elect to withhold amounts to cover your tax liability. Contact the agency paying your benefits for more information on how to change your withholdings from your benefits.
If you have started working again since receiving unemployment compensation, do a quick check to see where you stand. Use this IRS Tax Withholding Estimator to assist you in determining whether you should increase your current withholding amounts.
Calculate how much you expect to owe in taxes and make a payment towards your 2020 taxes. The IRS has great resources to help you calculate your payments here or contact your tax accountant to help you determine how much to pay. The 3rd quarter estimated tax payment is due September 15, 2020, and the 4th quarter estimated tax payment is due January 15, 2021.
The bottom line is that you want to keep as much money in your pocket as possible. Because unemployment is taxable, your compensation or current paycheck might be less after withholding adjustments. However, if done correctly, you will be paying less money to the IRS and get to keep more in your bank account at the end of the day.