Last year, we dealt with a lot of unknowns because of the coronavirus situation. Taxes were no exception. From the federal tax deadline being moved up to new legislation being passed, there were loopholes coming at us left and right.
A 401(k) WithdrawalMaybe you lost your job, or a loved one got sick with COVID-19, and you needed a lot of cash—fast. I hope you didn’t find yourself in this situation, but if you decided to drain your 401(k) to pay for life’s expenses, you need to be aware of the tax implications.
Unemployment BenefitsUnemployment benefits count as taxable income. When receiving unemployment benefits, you can opt to have 10 percent withheld for income tax purposes. You can also pay quarterly estimated taxes on your benefits, so you’re not hit with a big tax bill all at once. But if you haven’t paid income tax on your unemployment benefits yet, be aware they’re due on April 15.
Deferred Payroll TaxesThe Trump administration signed an executive order allowing employers to defer Social Security taxes from Sept. 1st—Dec. 31st, 2020. If your company opted in, you saw a 6.2 percent increase in your paycheck during those months—which was a nice cushion at the time.
Contract WorkLast year, a lot of people took on part-time work or started a side hustle when things got tight. If you’re in that boat, you’ll owe state income taxes, as well as the federal self-employment tax of 15.3 percent (if you made more than $400 in self-employment income in 2020). You’ll probably receive 1099 forms from the people you worked for and you’ll need to fill out a Schedule SE form to report any other self-employment income you made. If you expect to owe more than $1,000 in taxes for the year, the IRS wants you to pay quarterly estimated taxes.
A good rule of thumb for contract and self-employed work is to set aside 25 to 30 percent of every paycheck for taxes.