Unemployment Compensation Is Taxable. What To Do Now.
Unemployment compensation is fully taxable and will be added to your gross income. If you received these benefits from the Federal or State government, then they will be taxed on Form 1040 at the ordinary income tax rate. Then, the amount will be reported to the individuals on Form 1099-G by January 31st.
Millions of Americans could be facing additional tax problems because unemployment income is taxable and Federal income tax is not withheld. The normal state unemployment benefit runs for 26 weeks, and the CARES Act provided 13 weeks for up to 39 weeks of benefits. In addition, the CARES Act provided $600 weekly of unemployment income through the end of July, with an extension being discussed.
For example, if a taxpayer, was working at a clerical job in 2020 and earned $8,000 in gross wages through February 28th, 2020. His withholding on that amount was $1,000. The taxpayer was laid off on March 1, 2020 due to the pandemic and began receiving $300 weekly from his state unemployment insurance program, receiving 39 full weeks in 2020 or $11,700. The taxpayer also received an additional $600 weekly under the CARES Act from the Federal government through the end of July, for another $12,000 in 2020 benefits.
His total 2020 AGI will be $31,700 (8,000+11,700+12,000) and, after subtracting his roughly $12,700 personal exemption (including the new $300 charity), the taxpayer is left with $20,000 of taxable income. (We ignore the roughly $400 of EIC in this example assuming state tax may negate its overall net benefit) Tax will be (approximately) $2,200 and he has only had $1,000 withheld, so he is in a world of hurt here.
Solutions? First, the taxpayer needs to be aware of this potential problem. He can either:
- File a W-4V to get voluntary withholding applied immediately (it won’t be enough).
- Pay a quarterly estimate or 2 or 3 of say $400 each.
- Pay the $1,200 when he files his return.
- Or file his 2020 return and apply for an installment agreement.
With 36 million Americans having applied for benefits, this surprise may hit many taxpayers in all industries across the nation.
If you have any questions, contact us at James@AcePlusTaxResolution.com. If anyone that you know is struggling with tax problems, contact us at (213) 600-7388 or schedule a free consultation at AcePlusTaxResolution.com.