A record 33 million American workers are currently collecting unemployment benefits amid the coronavirus (COVID-19) pandemic. And with these benefits come the inevitable tax repercussions. Here are some ways to lessen the impact.
Unemployment benefits received through the state, as well as the $600 coming from the CARES Act, provided by the federal government through July 31, are all considered taxable income. While Social Security and Medicare costs do not come out of unemployment benefits immediately like they do with normal paychecks, the recipient will be taxed by both the state and federal government. This can result in the person winding up paying in the long run when it comes to tax season if he or she has not paid enough tax throughout the year. However, this little “surprise” can be avoided by taking a few extra steps when receiving unemployment benefits.
Withhold Taxes from Benefits
When applying for unemployment benefits, it is best to ask that 10 percent be withheld to cover federal income taxes. This step can still be taken if the person is already receiving unemployment benefits by filling out an IRS Form W-4V Voluntary Withholding Request. If someone is not sure whether this step has been taken, the Florida State Unemployment Agency can help confirm that the appropriate steps have been taken.
Pay Taxes in Lump Sum
If the taxpayer does not want income taxes withheld from each unemployment payment, the person can pay estimated taxes in a lump sum each quarter, similarly to what occurs with self-employed workers and small business owners. Speak with a Certified Tax professional to determine how much these estimated taxes will be before making any payment.
Set Aside Part of the Unemployment Benefit
This is a more self-disciplined approach, but if possible try and set aside a portion of each unemployment check to cover the taxes on the money at the end of the year.
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Source: CNBC.com