During the ongoing Coronavirus pandemic, millions of Americans lost their jobs and are now receiving unemployment compensation, many of them for the first time. For many taxpayers, they may be unaware that their unemployment is taxable and that they will most likely need to withhold from their compensation in order to avoid owing a tax liability when it comes time to file taxes.
Optima Tax Relief helps taxpayers understand what they need to do in order to stay on the right side of the IRS.
What is a withholding?
Federal law allows recipients to choose between a flat 10% withholding from the benefits a taxpayer receives in order to cover a portion of all of their tax liability. In order for recipients to change their withholding, they must complete Form W-4V, Voluntary Withholding Request and give it to the agency paying their benefits.
For recipients who choose to be exempt from a withholding, they can make voluntary quarterly estimated tax payments. Taxpayers are advised to make estimated tax payments quarterly in order to avoid owning a tax balance when it comes time to file.
Additional types of payments taxpayers should check for withholding
- Benefits paid by a state of the District of Columbia from the Federal Unemployment Trust Fund.
- Railroad unemployment compensation benefits.
- Disability benefits paid as a substitute for unemployment compensation.
- Trade readjustment allowances under the Trade Act of 1974.
- Unemployment assistance under the Disaster Relief and Emergency Assistance Act of 1974.
- Unemployment assistance under the Airline Deregulation Act of 1978 Program.
Those receiving unemployment benefits that return to work before the end of the year can use the IRS Tax Withholding Estimator to double-check that the right amount of taxes is being withheld from their paycheck.