It's Never Too Early to Check Tax Withholding
While it probably seems like tax season just ended, it is never too early to do a "Paycheck Check-up" to make sure the right amount of tax is withheld from earnings - and avoid a tax surprise next year when filing your 2020 tax return. As a reminder, because income taxes operate as a pay-as-you-go system, taxpayers are required by law to pay most of their tax as income is received.
Income tax withholding is generally based on the worker's expected filing status and standard deduction. The Tax Withholding Estimator is a tool on IRS.gov designed to help taxpayers determine how to have the right amount of tax withheld from their paychecks. This tool allows workers, retirees, self-employed individuals, and other taxpayers to enter their information using a clear, step-by-step method that helps them determine if there is a need to adjust their withholding and submit a new Form W-4, Employee's Withholding Certificate, to their employer.
Who Should Check Income Tax Withholding
People who should check their withholding include anyone who:
When To Do a Paycheck Check-Up
Taxpayers should check their withholding annually and when life changes occur, such as marriage, childbirth, adoption, and buying a home. The IRS recommends anyone who changed their withholding this year or received a tax bill after they filed their 2019 return should do a Paycheck Check-up.
By law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.
Millions of Americans currently receiving unemployment compensation (and for many individuals, an extra $600 in addition to regular unemployment benefits) may not realize that unemployment benefits are considered taxable income by the IRS and that tax should be withheld now to avoid owing taxes on this income when filing a federal income tax return next year.
Withholding is voluntary; however, federal law allows any recipient to choose to have a flat 10 percent withheld from their benefits to cover part or all of their tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request (PDF), and give it to the agency paying the benefits. Do not send it to the IRS. If the payor has its own withholding request form, use that form instead.
There are several different types of payments that taxpayers should check their withholding on including:
Recipients who return to work before the end of the year can use the IRS Tax Withholding Estimator to ensure they are having enough tax taken out of their pay.
In January 2021, unemployment benefit recipients should receive a Form 1099-G, Certain Government
Payments (PDF) from the agency paying the benefits. The form will show the amount of unemployment compensation they received during 2020 in Box 1, and any federal income tax withheld in Box 4. Taxpayers report this information, along with their W-2 income, on their 2020 federal tax return.
Paying Estimated Taxes
Taxpayers with a substantial portion of their income not subject to withholding − the self-employed, investors, retirees, those with interest, dividends, capital gains, alimony, and rental income − often need to pay quarterly installments of estimated tax.
Recipients of unemployment compensation that don't choose to withhold - or realize that the amount withheld is not enough - can also make quarterly estimated tax payments. The payment for the first two quarters of 2020 was due on July 15. Third and fourth quarter payments are due on September 15, 2020, and January 15, 2021, respectively.
Form 1040-ES, Estimated Tax for Individuals, includes instructions to help taxpayers figure their estimated taxes. They can also visit IRS.gov/payments to pay electronically. IRS offers two free electronic payment options where taxpayers can schedule their estimated federal tax payments up to 30 days in advance with IRS Direct Pay or up to 365 days in advance with the Electronic Federal Tax Payment System (EFTPS).
Financial transactions, especially those incurred late in the year, can often have an unexpected tax impact. Examples include year-end and holiday bonuses, stock dividends, capital gain distributions from mutual funds and stocks, bonds, virtual currency, real estate, or other property sold at a profit.
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The information above has been provided courtesy of our partners at TaxRite. This information does not constitute advice. For tax advice, please speak with a tax professional and or a certified public accountant.
Legal Club offers plans that include a Free Tax Preparation and Advice benefit. This benefit provides annual savings of approximately $250 - $300 on preparation of State and Federal Tax Returns as well as valuable tax advice. To learn more about the plans offered by Legal Club, browse this website or call us at 800-305-6816.
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