COVID Tax Tip 2020-101
Using the IRS Tax Withholding Estimatorcan help taxpayers have the right amount of tax withheld and avoid surprises when filing next year.
Income taxes are pay-as-you-go. By law, taxpayers are required to pay most of their tax as income is received. There are two ways to do this:
- Through withholding from paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation.
- Making quarterly estimated tax payments for income not subject to withholding.
Income tax withholding is generally based on the taxpayer’s expected filing status and standard deduction. Adjusting withholding on their paychecks or the amount of their estimated tax payments can help prevent penalties. This is especially important for people in the sharing economy those with more than one job and those who experienced major life changes in the last year.
The IRS also reminds people affected by COVID-19 to review their withholding status, particularly those receiving unemployment during this period.
The Tax Withholding Estimator on IRS.gov is designed to help taxpayers determine how to have the right amount of tax withheld. It offers workers, retirees and self-employed individuals a user-friendly, step-by-step method to help determine if they need to adjust their withholding by submitting a new Form W-4 to their employer or making additional or estimated tax payments.
When to check withholding
Taxpayers should check their withholding annually and when life changes occur, such as marriage, birth or adoption of a child or changes in employment. Anyone who changed their withholding earlier this year, received a large refund or tax bill after they filed their 2019 return, should also check their withholding.
Quarterly estimated tax payments
People with a large amount of their income not subject to withholding may need to make quarterly estimated tax payments. Taxpayers who have received unemployment compensation at any time this year should check their withholding by using the IRS Tax Withholding Estimator to learn if they should have taxes withheld or if they need to make estimated tax payments.
Based on the Tax Withholding Estimator results, taxpayers can choose to have federal income tax withheld from their unemployment checks or change the amount being withheld. To have taxes withheld from unemployment, they must complete Form W-4V, Voluntary Withholding Request (PDF).
Some financial transactions, especially when made late in the year, can have an unexpected effect on taxes. These 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.
Taxpayers have two free electronic options for scheduling their estimated federal tax payments. With IRS Direct Pay, people can schedule payments up to 30 days in advance. Using the Electronic Federal Tax Payment System, they can schedule payments up to 365 days in advance.
Aces & Associates, LLC offers up-to-date IRS tax tips year round. IRS.gov is the go to place for accurate and important news and we are happy to provide you the latest information.