The U.S. federal tax system works as a pay-as-you-go arrangement where you (as a taxpayer) are supposed to pay the IRS its share of your earnings relatively soon after receiving any income. Preferably throughout 2020, by one means or another, you'll pay towards your tax obligation, but this can be challenging enough under normal situations, especially for the self-employed.
You could easily find yourself facing an unexpected tax bill next spring when it's time to file 2020 taxes—especially if you received unemployment benefits, looking at the current pandemic situation and record unemployment rates. Or probably this rough year caused you to forget to make an estimated payment. However, it's not too late to restore the situation.
Control Your Withholding
When it comes time to file that tax return by April 2021, the taxpayers who work for employers and who were able to continue to do so during the pandemic might fare better than others. Based on the information they provided to their employers on their Form W-4, they already have paid as they earned because taxes are withheld from each of their paychecks. That money has been forwarded to the IRS on their behalf all along by the employers.
You have to keep in mind that your withholding should come pretty close to covering what you'll owe if you completed your Form W-4 correctly and if you didn't have any additional sources of income that you haven't accounted for on the form.
According to the IRS, Form W-4 can be changed as needed. They also recommend reviewing and updating the form from time to time to ensure that the information you initially provided to your employer is still correct. This form comprises your filing status, the number of your dependents, and any tax credits you're likely to claim—or that you won't be able to claim again this year.
To cover the extra income from a side gig that's been generating some much-needed cash during difficult times, you can request that more money be withheld from your pay - you can find a special line for this purpose on the Form W-4. Updating your withholding is important if you married, divorced, had a child, or had a child "age out" of dependent status at any time in 2020.
Something helpful which the IRS provides on its website is a handy tax withholding estimator.
Create Estimated Quarterly Payments
Taxpayers who prefer to leave their employers out of the process rather than request extra withholding or are their bosses can make estimated quarterly income tax payments. Probably at the year's end, these payments are based on what someone thinks they'll owe on all taxable income. To help you make an accurate prediction of what you're likely to owe, the IRS Form 1040-ES includes a worksheet.
Since the customers of sole proprietors and independent contractors don't typically withhold taxes from their payments to them, the proprietors and contractors must make estimated payments. If they don't do this and come up short at filing time, the IRS will charge penalties. However, other taxpayers are allowed to pay in the same manner. A quick tip would be that if you suspect that you'll owe the IRS $1,000 or more in income tax for the year, then the key to avoiding an estimated tax penalty is to pay at least 90% of your tax bill by year's end Since estimated payments are due to the IRS four times a year, the "quarterly" part of this option is derived.
Claiming Unemployment Benefits
2020 has been a rough year, and many citizens of the U.S. who were out of work during the coronavirus pandemic (about 13.6 million of them as of August 2020) received a $600 per week bump in their unemployment checks under the terms of the Coronavirus Aid, Relief and Economic Security (CARES) Act through at least July 31, 2020.
Taxpayers such as sole proprietors and independent contractors, who would not normally be eligible to collect unemployment benefits, could collect during this same period if they lost their jobs due to the pandemic. Although, keep in mind that these unemployment checks are taxable income.
There is a good chance that you might receive a Form 1099-G, which shows how much you received in the way of unemployment benefits and how much you had withheld for taxes.
Getting a Stimulus Check
The stimulus check (or officially called the "Economic Impact Payment") provided by the federal government to help many Americans during the 2020 coronavirus economic crisis is not taxable income. For the 2020 tax year, the Economic Impact Payment or EIP is technically advanced on a one-time refundable tax credit. Rather than making you wait until you file your 2020 tax return in the 2021 filing season to claim the money, the IRS distributed the checks.
This year being harsh on us and catching us off-guard may have affected our income and how we earn that money. And hence it is important to make sure that you have estimated how much you'll be taxed on, including any unemployment payments received, as soon as possible in 2020. However, you still are free to choose from options to catch on that will be owed to the IRS next April, including two more rounds of estimated quarterly payments and employer withholding. At UBOS, our experts are always available to guide you with anything related to tax planning, tax strategies, and more. Do contact us today at Ubos to begin your consultation and learn more about how we can help you!
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