Now that we are more than four months into the US’s containment efforts of COVID-19, how are you doing? Depending on where you live in this country, things in your neighborhood might be opening up or shutting back down again. The response and effects have been varied throughout the country, but one thing is the same from sea to shining sea: unemployment.
By June 20, there were almost 33 million people collecting unemployment benefits throughout the country. Are you one of them? If not, you likely know at least one of them. Here at Guide Financial Planning, we have had both clients and family members who have had to file for unemployment benefits due to the coronavirus pandemic. Thankfully, the CARES Act has provided an extra cushion for those currently facing job loss or a reduction in hours through the end of this month.
The article linked in the previous sentence can explain what the CARES Act has to offer you but today we are going to talk about taxes. While the stimulus check you may have received this spring wasn’t taxable, any unemployment benefits you have received are. It’s important not to overlook that important fact.
As an employee, you are used to your employer withholding your taxes for you, so you don’t really worry about it. With unemployment benefits, it’s your job to make sure those taxes get paid or you’ll have a big surprise in the form of a big tax bill next spring. If that doesn’t sound like fun to you, there are three things you can do to avoid it. For clarification, at Guide Financial Planning we are not accountants and this should not be taken as tax advice, but rather general options to be considered for all unemployment, not just that related to the coronavirus.
Option #1: Request Tax Withholdings
If you like the way your employer withheld taxes for you, then you can ask the IRS to do the same with your unemployment benefits. This is the easiest option, though it cuts into your benefits and any overpayment is out of reach until you file for your tax return next year.
To request tax withholding from your unemployment benefits, simply submit Form W-4V to the IRS. The same form can be used to reverse the decision if you request withholding and later change your mind. For state tax withholding, it will depend on your specific state. You can check with your state’s requirements through the U.S. Department of Labor’s CareerOneStop.
Option #2: Make Estimated Tax Payments
For a more hands-on approach, you can calculate your own withholdings and send them to the IRS regularly. This is how self-employed people who don’t have an employer withholding taxes for them do it all of the time. If you don’t want the IRS withholding money for you, this is the best way to avoid a large tax bill and potentially a penalty for underpayment of taxes.
You can calculate and pay estimated tax payments with the IRS’ Form 1040-ES. Estimated tax payments are due quarterly. Taxes based on income earned through August 31 is due on September 15 and the taxes based on your September 1 to December 31 income are due by January 15 of the following year. This IRS page lists the entire payment schedule.
Option #3: Fund A Savings Account
If you’re worried you won’t have enough to make it if you send money to the IRS, you can hang on to it. However, you will still owe taxes on your benefits when you file your return next spring. The best way to handle this kind of situation is to deposit your estimated tax payments into a separate savings account. That way, you can access the money if you really need to but will otherwise have it available to pay when you file your return.
If your finances have been turned upside down by COVID-19, you are clearly not alone. For help figuring out your unemployment benefits and what you should be doing with your finances right now to stay afloat, consider one of our Quick Start Sessions for a one-time meeting with a CERTIFIED FINANCIAL PLANNER™ professional who can help you sort out your most pressing issues. If you’re looking for more in-depth help that looks at every area of your financial life and maps out a plan for you to achieve your goals, then you want a comprehensive financial plan. To learn more about either service and find out which is best for you, schedule a free telephone consultation today.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.