Did you know unemployment benefits count as taxable income? If you (or someone you know) have received unemployment income during this year when so many people have experienced job loss, here is the bigger question: Did you have taxes withheld from the payments?
If you are currently receiving unemployment income, now is a good time to check and see if federal and state income taxes are being withheld; if they are not, you should be able to change that going forward. Why does it matter? Next winter when you file your 2020 tax return, you will find out how much tax you owe on your 2020 income. If you didn’t have enough withheld from your paychecks, then you may need to pay in by April 15. It’s possible that the amount you need to pay in could be $1,000, $2,000 or even more. In addition, you may owe penalty for not having enough withheld, and/or a penalty for late payment if you cannot pay the bill in full by April 15.
What can you do now? If you received unemployment income and did NOT have taxes withheld, I would encourage you to go to the IRS Tax Withholding Estimator, and enter information about all your income for the year, along with the information it asks for about family size and other tax-related issues. Don’t worry; this is anonymous – it’s just a calculator for your own benefit. Based on the results of your calculations, you should have a pretty good idea of what to expect. If it looks like you will owe taxes, you can start saving now, or even send in one or two quarterly estimated payments using IRS form 1040 ES. Checking in with your tax preparer might also be a good idea.
The IRS recently issued a poster alerting people to take action and avoid the unpleasant surprise of a big tax bill. If you can, please consider posting it on social media or posting printed copies at your place of work, or house of worship, or at local businesses, to help others plan ahead.