Since the COVID-19 pandemic ravaged the U.S. economy, millions of Americans have been receiving unemployment compensation; for many, it is their first time. Since unemployment numbers have skyrocketed over the past few months, the Internal Revenue Service (IRS) recently issued a reminder for those receiving unemployment payments, stating they may withhold taxes from their benefits now to prevent owing taxes on this income when they file a federal tax return in 2021. Taxable benefits consist of any unemployment payments enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Doeren Mayhew’s tax advisors provide insights on what you need to know about withholding if you’ve received unemployment compensation as a result of the pandemic.

It’s important to note that withholding is voluntary, but if a beneficiary chooses to do so, they must fill out Form W-4V (Voluntary Withholding Request) and submit to the agency paying their benefits. In the event a beneficiary does not elect to withhold taxes or if the withholding amount is not enough, they have the option to make quarterly tax payments. Payment for the first two quarters of 2020 was due Jul. 15, 2020, payment for the third quarter is due Sept. 15, 2020, and payment for the fourth quarter is due Jan. 15, 2021.

Payments You Can Withhold

Taxpayers may be surprised to learn they are actually beneficiaries of unemployment benefits and can elect to have  taxes withheld. If you have received any of the following, be sure to check your withholding amounts:

  • Benefit payments from your state or the District of Columbia from the Federal Unemployment Trust Fund (FUTF)
  • Railroad unemployment benefit payments
  • Disability benefit payments substituted for unemployment payments
  • Trade readjustment allowances from the Trade Act of 1974
  • Unemployment payments from the Disaster Relief and Emergency Assistance Act of 1974
  • Unemployment payments from the Airline Deregulation Act of 1978

Reporting Your Unemployment Compensation

In the event a beneficiary returns to work before the end of the year, they may use the IRS Tax Withholding Estimator to ensure  enough taxes are being withheld each pay period. When January 2021 rolls around, beneficiaries should receive Form 1099-G (Certain Government Payments) from their benefits agency. This form will reveal the amount of unemployment compensation paid in 2020 in Box ,1 as well as any federal income taxes withheld in Box 4. Taxpayers will then report these numbers with their W-2 income on their federal tax returns.

If you have questions regarding withholding taxes on your unemployment compensation or reporting them, contact Doeren Mayhew’s tax advisors today.