As Americans receive taxable unemployment compensation, the Internal Revenue Service ("IRS") issued a reminder that taxpayer's may elect to have tax withheld from their benefits now to help avoid owing taxes on this income when they file their federal income tax return next year.
Unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.
Withholding is voluntary. The law allows any recipient to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability.
If a recipient doesn't choose withholding, or if withholding is not enough, they can make quarterly estimated tax payments instead. The payment for the first two quarters of 2020 was due on July 15. Third and fourth quarter payments are due on September 15, 2020, and January 15, 2021, respectively.
In January 2021, unemployment benefit recipients should receive a Form 1099-G, Certain Government Payments (PDF) from the agency paying the benefits.
If you are unsure of the ramifications of the unemployment tax withholdings deferrals, please contact the Tax Attorneys at Fazzio Law, we are in your corner!
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