This may seem like an overly early post, since the next 2020 quarterly taxes aren’t due until June 15th . However, this post is a reminder to start saving your money now so you’ll be ready to write the check come June.
I’m writing this post because I’m concerned that, come next April, a lot of people are going to find that they owe a bunch of money.
The source of the problem is that the government doesn’t withhold taxes from unemployment. (Note that you can opt to have the government withhold 10%. This does not guarantee that it’ll cover all of your owed taxes, but it’s something. If you want to do this, request and fill out Form W-4V.)
Normally, unemployment income is pretty low to the point that staying on it a full year would mean you probably owe almost no tax. Naturally, the hope is that people won’t need to stay on unemployment for a full year. So the withholding on their new job may cover the shortfall from any unemployment period.
But the weekly stimulus bonus of $600 is changing that. Here in Arizona, unemployed people (at least ones who weren’t self-employed) will be getting as much as $3,360 a month. That’s the equivalent of $43,360 a year. So yeah… Taxes need to be paid — and they have to be paid quarterly or you could incur penalties.
This means that you need to be putting aside some money from each unemployment check and that you need to file quarterly taxes with the IRS.
If the word “penalties” has you freaking out, try to calm down. The truth is that they’re actually too bad, which we’ll get into later. But they do exist, and they’re a reminder of just how important it is to try to pay on time.
But the more important reason to just breathe: Quarterly taxes aren’t nearly as daunting as they sound. In fact, they’re pretty simple (with one notable exception we’ll get to in a moment). And I’m going to do my best to hold your hand through the process.
So, first thing’s first, here is a direct link to the form you’ll need (1040-ES) and its instructions.
Now here’s what you’re going to see.
First, you need to figure out how much tax you have to pay. That’s where the worksheet comes in.
I know, I know. This looks complicated and/or scary. But if you go through, it holds your hand pretty well. (The 2020 Tax Rates can be found on page 7 of the form, by the way.)
The only real hard thing (that “notable exception” I mentioned previously) is this: To use the worksheet, you have to know how much you’ll make this year. Kind of hard to do when you don’t know what kind of job you’ll end up getting — or if you’ll end up getting one at all.
So honestly? If necessary, just use your best guess. Because paying something is better than paying nothing.
That said, here’s my take, for what it’s worth — but please bear in mind that I’m not a tax professional.
For $40,000 or less
If you make less than $40,000 a year (therefore, probably about what you’d make on unemployment), take what you’ll earn April through June and times it by four.
Then subtract your standard deduction: $12,400 for individuals, $18,650 for head of household or $24,800 for married filing jointly. You should now have a decent estimate of your adjusted gross income for the year.
(The dependent credits are now pretty confusing, so frankly I suggest ignoring those. But if you absolutely can’t afford to overpay, then check the link in the previous sentence and/or tax topic 602/publication 503 on the IRS website for guidance on how much you can get in credits.)
For more than $40,000 a year
So okay, that’s all well and good for people making $40,000 or less. But what if you make more than that normally and think you can get your old job back or at least get one with very similar pay?
In that case, personally I’d skip the worksheet. Instead, figure out what you’re going to get from unemployment April through June and multiply that by your 2019 effective tax rate.
FYI, your effective tax rate = tax paid (line 16 on your 1040 form) divided by gross income (line 7b).
Again, I’m very much not a tax professional, so these are suggestions only.
As I understand it, H&R Block professionals only charge you when they fill out forms, so you could always call/go in and ask if they have a better way of figuring out what you’ll owe or a safe way to estimate adjusted gross income.
And of course, what you owe might be moot. You may not be able to save that much out of your checks. You may need all but 5% of what you get. So worst case scenario, just pay what you can. Every dollar you pay now is $1 less accruing penalty interest.
To pay electronically
I’ll cover how to fill out and mail in the voucher below, but you do have the option of paying electronically.
You just need to go to this IRS page. You can choose a bank transfer, which is free, or to pay by debit or credit card and pay a processing fee.
If you’re paying taxes on just unemployment earnings, the processing fee options (the lowest of which is $2.50) will be more than you get from most rewards credit cards. So I would only use this option if you’re going for a sign-up bonus.
Note: Don’t charge estimated taxes just because you don’t have enough money to pay what you owe. Credit card interest rates are significantly higher than IRS penalty rates.
If you choose “Bank Transfer” you then need to choose “Make a Payment” on the next page. On the following page, choose “Estimated Taxes” from the dropdown menu. The rest of the boxes will auto-populate with the correct information.
The next page has you verify your identity with your Social Security Number, address, filing status and date of birth. You then enter the amount, your bank account information and click “Continue.”
I wasn’t making an electronic payment, so I can’t see what comes after that, but presumably it would just be a Confirm Payment option.
If you prefer to pay by debit/credit card, click that button on the payments page. (Here is the link again.) You will be taken to a page showing three different payment options, each with its own processing rate and minimum fee. Choose the one that works best for you, then you’ll be taken to a page that shows various forms.
Choose “Form 1040-ES Estimated Tax.” Fill out the payment amount and click “Continue.” On the next page, fill in your name, Social Security Number, date of birth, address, phone number and email address then click “Continue.” On the following page, fill out your card information and click “Continue.” Again, I couldn’t go past this page, but I presume it’s a “Confirm Payment” page.
Or you can go old-school with a good old fashioned mail-in voucher.
Don’t panic — it’s easy, I swear!
You can find the payment voucher forms by using the link I gave you earlier (here it is again) and scrolling down to pages 10 and 11. There’s a separate voucher for each quarter, so make sure you choose the right one.
In this example, I’m using Payment Voucher 2, since that’s the first quarter newly unemployed people will pay estimated taxes.
As you can see, the voucher is pretty easy to fill out. You can type it in when viewing the form online or you can print out the form and fill it out by hand.
Either way, use the top box in the right corner to enter the amount of tax you sending in. Use a whole dollar amount.
On the first full line of the form, you fill out your first name and middle initial, your last name and your Social Security number.
If you’re married… Well, first of all, if your spouse is still employed, consider skipping this whole quarterly taxes thing. Instead, have your spouse increase his or her withholding tax. But failing that, go ahead and fill out your spouse’s name and Social Security number.
Next comes your address.
And voila, the form is complete! Whoohoo!
It says this on the form, but it’s worth noting two things:
- Make the check out to the United States Treasury
- Put Form 1040-ES and your Social Security number on the Memo line
And that’s it. Now you’re ready to mail it off!
But where you mail it depends on your location. Here’s a handy list of the addresses:
Incidentally, this list is in the 1040-ES forms and instructions I already linked to. But hey, here it is again. We want to make this as easy as possible right?
Now just pop that second quarter form in the mail by June 15th. Third quarter has to be mailed by September 15th and the fourth quarter one needs to be sent by January 15th.
As a note, when you send the form off, I suggest getting certified mail. That will give you a tracking number, which means you’ll have proof that you did remit payment — just in case the envelope gets lost in the mail.
Don’t forget state taxes
If you pay state income tax, you’ll need to make an estimated payment to the state as well. Again, it may be best to figure out your effective tax rate from the previous year (tax paid divided by gross income) and apply that to whatever you received from unemployment.
To find the form, go to your state’s Department of Revenue website. There will be a Forms section. At least here in Arizona, the form just asks for the same information as the 1040-ES, so it’s very simple.
As I said, these aren’t heinous. For example, if you underpay by $1,000, then as of 4/15/21 you’d owe $33.98. So we’re not exactly talking about crushing penalties here.
Still, that’s in addition to that $1,000 that you need to still pay. And if you’re on unemployment for the rest of the year (and continue not to pay quarterly), then it’ll add up.
But if you can’t pay and need to wait until you have a job again, just know that you won’t be wracked with onerous penalties. Still, $33.98 buys a lot of toilet paper and Lysol wipes, guys. So do your best to make the payments.
Have you had to pay estimated taxes before? Are you looking at doing it this quarter?