How Quarantine May Impact Your Next Tax Return
Whether you’re working from home, out of work, or taking on new side-gigs, the coronavirus has impacted millions of people’s regular work schedule. And while taxes might not be an immediate concern right now — the tax deadline and payment due dates got pushed to July 15, 2020 — different arrangements can lead to new tax implications.
Knowing what will happen upfront can help you prepare, perhaps by setting money aside to pay more taxes later or by keeping track of expenses that you can deduct to lower your tax bill.
Working From Home — Not Much Changes
If you’ve kept the same job but started working from home, your tax situation might not be different. Assuming you’re an employee, rather than a small business owner, the Tax Cuts and Jobs Act (TCJA) axed many of the tax deductions that you could take in the past.
Unreimbursed business expenses and home office deductions are gone from 2018 to 2025 (they’re still available to self-employed people, just not employees). So, while an ergonomic setup for your new home office might be appealing and beneficial, know that you won’t receive any tax benefits. However, your employer can still write off the purchase as a business expense, so you may want to ask them to make the purchase for you or reimburse you.
Collecting Unemployment — It’s Likely Taxable
Whether you’ve been let go, furloughed, or had hours cut, you may be able to file for and collect unemployment benefits. In most cases, the money you receive is considered taxable income. (If you contributed to a private unemployment fund or your company has its own fund, those disbursements might not be taxable.)
At the start of the next year, you’ll receive a Form 1099-G showing how much you received in unemployment benefits. You’ll add this amount to your taxable income when you prepare your tax return, and may have to pay more income taxes as a result.
To lessen the blow later, you can choose to have money withheld from your unemployment benefits, similar to how employers withhold money from paychecks. However, that means you’ll also receive less money now, when you may need it most.
Start a Second Job — Update Your W-4
If you’ve taken on a second job as an employee, you may want to update your Form W-4 with all your employers. What you put on the form will impact how much money your employers withhold from your paycheck for taxes, and how much you’ll have to pay or receive back when you file your annual tax return.
The IRS released a new version of the Form W-4 in 2020, so you may want to update the form with your current employer even if you didn’t take on a new job. Additionally, you can use the updated Tax Withholding Estimate app to help ensure you fill the form out correctly and your employer will withhold the right amount.
Take On a Side Gig — Record Your Expenses and Pay Extra Taxes
Some people are supplementing lost income by taking on freelance or contract work. With a few popular side gigs, such as driving for a delivery service, you’ll likely be a contractor rather than an employee. For tax purposes, you’re self-employed if you take on any of these jobs (i.e., you’ll receive a 1099-MISC rather than a W-2 from the company).
Being self-employed can lead to paying higher taxes because you’ll need to pay an additional self-employment tax on your income. However, as a small business owner, you’ll also now be eligible for business deductions.
These can include the aforementioned home office deduction (although there are strict rules) and health insurance premiums if you’re not eligible for coverage from an employer or spouse’s employer. It’s also important to record the miles you drive for work as you may be able to claim a large mileage deduction, particularly if you took on a delivery side gig.
Free Help Managing Your Finances
Whether you’re working the same job or trying to figure out how to make ends meet without a regular income, the coronavirus outbreak is adding new stress to everyone’s life. If you’d like a guiding hand, you can schedule a free debt and budget counseling session with one of Money Management International’s trained counselors.
You can also learn more about staying financially and physically safe in our frequently updated list of Coronavirus Articles and Resources.