The arrival of a new year means tax season is here again. This year, things are even more complicated considering 2020 was an unpredictable roller coaster of employment, unemployment, shaky markets, and of course, COVID-19. While we all still have to pay our taxes, there may well be more questions about how to do that than ever before.
Here are some quick FAQs to help with preparing your 2020 tax return in 2021:
In Louisiana, unemployment benefits are taxable at both the federal and state levels. You must claim unemployment income, and you are responsible for paying the taxes for it. If you filled out a Form W-4V (a Voluntary Withholding Request), that would have set aside 10% of your payments for federal tax. You also could have paid your taxes quarterly.
In any case, you will owe any balances due on those benefits. Keep in mind that, if your unemployment benefits added up to more than you normally make, that additional income may affect earned income tax credits.
You should receive either a W-2, Wage and Tax Statement, or a 1099 form from each of your employers.
If you switched full-time jobs midyear, for example, you should receive a W-2 from each of your employers.
Similarly, if you have a full-time job with benefits and supplement your income with an additional part-time gig or two, you should receive a W-2 from your primary employer as well as either a W-2 or a 1099 form from each of your other income sources.
Note that employers who issue 1099s do not withhold taxes or make distributions to programs like Social Security and Medicare — those responsibilities are yours to fulfill. So when filing, you must include all of your W-2s as well as any 1099s to account for income collected in 2020. The amount you actually owe will depend on your total taxable income from all of your sources of income.
If you earn $400 or more, the IRS considers you self-employed. That means you must file an income tax return as well as pay self-employment taxes that equate to the sums for Social Security and Medicare, which are typically withheld and paid by employers issuing a W-2.
As a freelancer, you should receive a 1099-MISC from any client who pays you $600 or more, and you’ll report those 1099 earnings on a Schedule C attachment to your tax return. However, freelancers can’t leave their responsibilities until the end of the year. Since freelancers can’t rely on employers or clients to withhold and pay their taxes throughout the year, freelancers should pay estimated quarterly taxes themselves.
IRS Form 1040-ES, Estimated Tax for Individuals, is designed to help you calculate and pay your estimated taxes. Of course, like all things tax-related, there are thresholds for how much you must pay whom—or whether you must pay anything at all—but in nearly every case, you must at least file a return.
If you’re self-employed and use a portion of your home exclusively for your business, you might be able to write off part of the expense. If, however, you ended up working for your employer from home, you’re probably out of luck—even if you did have to buy a desk or other equipment. As the IRS explains:
The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.
Strict guidelines govern deductions related to home expenses, and those who qualify have the choice of calculating their deduction one of two ways: standard or simplified. If you fall into a grey area here, it’s best to speak with a tax professional who can help you navigate the best route.
The economic impact of COVID-19 and federal relief efforts have created many complex tax situations. The IRS offers assistance by phone, through its website’s Interactive Tax Assistant service, and via the IRS2GO mobile app. However, if you are facing unique or confusing circumstances, you may require the expertise of a certified public accountant or professional tax service to ensure you pay your 2020 taxes properly.