June 24, 2020
Jun. 11--Today I'll answer questions from readers about unemployment -- including withholding for taxes -- and when the IRS will start paying interest on late tax refunds.
Q: I'm a sole proprietor whose work completely stopped as of April 1 due to COVID. I certified the month of April that I had not earned any money during this time. Then I came across your article and other information that indicates you're supposed to report money received during this time. I did receive payment in April for work I did in prior months, all the way back to December. Now what? I've tried reaching the EDD via phone but, of course, I can't get through, and submitting a question via the website form always gives me an error message. If I entered the wrong information during the certification process, it was without malice or intent to defraud. Did I in fact mess up? How can I fix or get further clarification on this?
A: You messed up, but it's easy to see how. When you are receiving unemployment benefits, every two weeks you have to fill out an online "certification" questionnaire to see if you are still eligible for benefits. One question is: "Did you work or earn money, whether you were paid or not? If self-employed, report earnings during the week you receive the money."
This is not entirely clear from the question, but the first sentence applies to former employees receiving regular state unemployment benefits. They report income the week it was earned, not when they were paid.
The second part applies to self-employed people receiving federally funded pandemic unemployment assistance, better known as PUA. They report income the week it was paid, even if it was earned long before they went on unemployment -- or paid long after it was earned. If they're paid when they're off unemployment, they'll never have to report it.
Here's why it matters: Any money you earned or were paid in one week will be deducted from your basic benefit that week according to this formula: If you made more than $100, EDD will deduct 75% of it from your basic weekly benefit (excluding the extra $600 per week being paid from April through July under the Cares Act). If you made $100 or less that week, EDD will ignore the first $25 and subtract the rest from your basic benefit. If it reduces your benefit below zero, you will also lose the $600 that week.
As for correcting mistakes on past certification forms, EDD spokeswoman Loree Levy said, "If there are earnings that didn't get reported on past certifications, the individual can send a message to EDD through his UI Online account and note the earnings and when they were received. He will be contacted if we need any further information or if he may have to pay some of his benefits back."
It's also important to note that if you work or earn money while receiving unemployment, you are to report your gross earnings, before expenses and taxes. This is true whether you are getting regular or pandemic benefits.
However, when people apply for unemployment, former employees report their prior gross earnings for the 12-month base period used to determine benefits. Self-employed people report their net earnings.
Q: I have been getting unemployment since late March. When I fill out the biweekly claim form, I check the box giving EDD permission to take 10% out for taxes. When I get my money, they only take taxes out of the basic amount (for me, $298), not out of the extra $600/week stimulus money. Isn't that money taxed? I'm afraid I'm going to get hit with a huge tax bill come next spring.
A: All unemployment benefits -- including the extra $600 coming for April through July under the Cares Act -- are taxable on your federal return, but not on your California tax return. (Some states do tax unemployment benefits.)
EDD will withhold 10% from your basic benefit if you request it, but it "is not withholding taxes from the $600 federal stimulus payment a claimant receives" from April through July, Levy said. The $600 per week amounts to about $10,000 over four months.
Depending on what other income you -- and a spouse, if married -- will have this year and your deductions, 10% may not be enough to cover your actual tax.
If that's the case, you might want to consider making estimated federal tax payments to cover your projected bill. These payments are made quarterly; those normally due April 15 and June 15, are due July 15 this year.
Another way to cover the tax is to increase payroll withholding if you get re-employed, or increase a spouse's withholding if you file jointly.
You can estimate your tax using the IRS calculator at irs.gov/individuals/tax-withholding-estimator.
Q: I filed my taxes in March and still haven't gotten my refund. When will the IRS owe me interest on the overpayment?
A: If the IRS hasn't refunded an overpayment within 45 days of the due date of the return (excluding extensions) or the date the return is filed -- whichever was later -- it must pay interest on the refund starting from that date until it's paid.
Normally the due date of the return is April 15. This year, the IRS extended the due date for 2019 tax returns until July 15.
It's not clear, though, whether interest would begin accruing 45 days after April 15 or July 15.
"There is some uncertainty as to the authority of the IRS to change the due date since it was Congress that set the April 15 filing date. The IRS acted because it was ordered to extend the date by the president under his national emergency declaration," said Mark Luscombe, principal analyst with Wolters Kluwer Tax & Accounting.
"I have not seen anything official from the IRS, but I believe that July 15, 2020, is viewed as the revised due date ... so the 45-day period would run from July 15," he added.
IRS spokesman Raphael Tulino would only say, "We're continuing to review the issue, and we hope to have more information soon."
The current interest rate on late refunds is 3% per year.
Kathleen Pender is a San Francisco Chronicle columnist. Email: email@example.com Twitter: @kathpender ___
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