For the nearly 60 million Americans who filed for unemployment benefits in 2020, tax season may hold a bit of a shock. Many first-time recipients of unemployment benefits are unaware of the process of electing to withhold taxes, and now must make estimated payments or set aside funds they may not have. Prestige Tax Office, a well known provider of tax franchise opportunities, are well aware of the effects COVID-19 and unemployment will have during tax season and hopes to use their 9+ years of experience to help anyone with questions or concerns.
Regardless of the state you live in, your unemployment income is taxable and must be paid, or you could face penalties. If you have not signed up to withhold your taxes, you may make payments either in installments or in one large sum during tax season. You will need to pay your unemployment income tax quarterly if you were reported liable on your 2019 1040 form. If you are unsure if this applies to you, you can review last year’s 1040 and check line 23; this line will tell you the amount you owe and your liability. If this line is blank and your 2019 taxes covered the full twelve-month, you do not have to pay quarterly.
If you are tax liable, it is essential to keep up with the 2020 quarterly deadlines (July 15, September 15, and January 15, 2021). To calculate your quarterly payments, you can use the IRS website as a resource to help you calculate these estimated payments or contact a tax professional. The IRS penalties for late payments are 5% of the additional taxes owed amount for each month your return is late (maximum of 25%). If you file more than 60 days after the due date, you will be charged a penalty of $135 dollars or 100% of your unpaid tax (whichever amount is smaller). Finally, for any month in which both the late-payment and the late-filing penalties apply, the late-payment penalty of 0.5% is waved.
If you are currently unemployed and have not been paying quarterly payments, there are other resources at your disposal. If you are eligible, the earned income tax credit (EITC) could be an excellent resource to gain tax credits. The EITC provides eligible recipients with $538 – $6,660 in tax credits, depending on your income and number of dependents. The 2020 income limit for single filers (without dependents) to qualify for the EITC is $15,820 and $21,710 for married households. If you qualify and the number of tax credits is higher than the amount you owe, you may receive of refund.
With the many changes to state and federal laws resulting from the COVID-19 pandemic, the upcoming tax season is expected to be both hectic and challenging for many Americans. Prestige Tax Office has helped many entrepreneurs discover their dream of owning their own tax prep business and are committed to the mission of helping others to navigate the complex world of taxes.