Updated: Jul 7, 2021
It's hard to believe that another tax season is upon us. In the coming weeks, 2020 tax returns are going to start getting filed. Are you ready? Start looking out for all of your end-of-year statements to show up in the mail. There might be a couple surprises that we wanted to quickly go over that some may not be aware of while also answering a few questions many have had.
1. Am I going to be taxed on my stimulus checks?
No. The two checks that were sent out to individuals and families will NOT add to their taxable income. So the individuals who qualified and received $1,200 per adult, and $500 per child, will not have to count that as income. The same individuals who received the $600 per adult and child at the end of 2020 will also not have to count any of that money as income.
The stimulus checks are refundable credits on the 2020 tax return. Instead of waiting for the 2020 tax return to be filed, anyone receiving the checks received an advance on their refund.
If a taxpayer was going to owe on their taxes, they will still owe since the refundable credit was already handed out. Basically the tax consequences that were incurred are what they would have been without having the extra stimulus checks. Which leads to the next two items that may lead to some unexpected tax owed.
2. Are all my unemployment benefits taxable?
Yes. Any and all unemployment benefits are taxable. This last year, a record number of Americans signed up for unemployment. Many who claimed these benefits may not be as familiar with how these benefits work, as this provision was extended to freelancers, independent contractors, and self-employed individuals who usually do not qualify to take unemployment.
The amount was also increased by $600 a week for anyone who qualified under the CARES Act. This amount is included as unemployment and as such is taxable. For those who received any unemployment, they should expect to pay taxes on these benefits.
When filing for unemployment, there is an option to withhold 10% for federal taxes. This is strongly suggested, especially for those who are claiming the benefits for a longer period of time. The issue is there are only two options: 1. Withhold 10%, or 2. Withhold nothing. While the 10% will help, it may not be enough. A single filer who makes more than $9,975 in taxable income is in the 12 % tax bracket. So any amount over that amount would have an additional 2% owed in tax.
In addition to the extra that may be owed on the federal tax return, there is no provision to withhold state tax when filing for unemployment. So for those who live in a state with an income tax, expect to pay an additional 6% to 12% (depending on the state.) This comes as a surprise to many. Try to set aside some cash for the state if possible and when applicable.
3. I took on a side gig. Will I be taxed on that income?
Yes. Side gig, freelance, or side job income is taxable. Taking on an extra job isn't bad, in fact that is a great way to make a little extra money each month to help save for your future self. "Extra" jobs like this are increasingly popular as households look for help to supplement their income. However, many who do not work like this on a regular basis are probably not aware of how much is taxed on this type of income.
Most individuals who work realize that this extra money will add on to their income, and they will owe federal tax, and if applicable state tax. The hard part is when you are given the whole lump sum of money from the job, you as the individual are responsible to pay the applicable tax. It is not withheld from the check like what happens when you're an employee on a business's payroll.
In addition, there is a self-employment tax of 15.3% on top of federal and state tax. This covers the Social Security and Medicare payment that is normally withheld from an employee's check. This may sound a little high compared to what is usually taken out for those amounts, and it is. In fact, it's double. That's because the employer pays half of the bill for each employee.
Someone who is "self-employed" is then responsible to pay both parts of Social Security and Medicare. This is referred to as self-employment tax. If you made over $400 in this type of income, you will owe self-employment tax. Typically you would want to set aside 25-30% to pay for all self-employment and side gig taxes.
Many businesses who contract outside work are required to send a 1099 tax form to the self-employed individual, as well as to the IRS. They are sent out by the end of January, like a standard W-2 is, so be on the lookout for these forms. State unemployment agencies will also send out 1099-G forms for each individual filing for unemployment.
If any of these topics are a concern for you, or you are not sure how to prepare your tax return with these additional types of income, you're not alone. We are here to help. Feel free to contact us. We can prepare your 2020 tax return, provide tax and financial planning, and leave you more time to focus on taking care of your more important tasks -- like lining up that new job or side gig.