Questions and Answers on Unemployment Taxes and PPP Loan Taxes

Living through the COVID-19 pandemic presented a lot of unprecedented situations, such as record numbers of unemployment claims, postponing Tax Day and the largest economic stimulus package in U.S. history. We know you have questions on how COVID-19 could affect filing your 2020 taxes, so we’re breaking them down with the help of April McDaniel, a CPA at Kopsa Otte, an accounting firm that specializes in salons, spas and beauty distributors..

Kopsa Otte Disclaimer: Because every situation is different, it is important that individuals seeking specific advice contact a professional advisor. The info provided does not constitute legal, tax, accounting or financial advice and is offered as an info service only. No liability whatsoever is assumed in connection with the use of this info.

I received a loan via the Paycheck Protection Plan. What should I know about my tax liability?

“Right now, we need guidance on Paycheck Protection Plan (PPP) loan treatment for taxation purposes. As it stands today (Aug. 13, 2020), expenses paid with the proceeds of the PPP loan are not deductible.  This is a big deal. I hope they tell us that soon. Taxpayers need to know so they can plan for their tax liability,” said April. 

I received unemployment checks while out of work. How much should I set aside to pay for taxes on unemployment during tax season?

Here’s what April recommends: “20-30% of gross unemployment benefits is probably a safe amount to set aside. For many it could be too much, for others not enough but it’s a good start. There are so many factors that determine the average % of tax a taxpayer must pay. There is not a one size fits all.”

How can I avoid getting caught off guard with a large tax payment?

“It is very important to have ongoing communication with your CPA to reduce and/or eliminate surprises,” April said. “This year if a business owner has gotten a PPP loan, it will especially be a challenge. In fact, meeting with your CPA to discuss your income/expenses throughout the year to explore your potential scenarios rather than after the year is over is a great way to strategize to pay less tax.”

I’m still receiving unemployment. Should I make any changes now?

“I’d say for most Americans, having taxes withheld from their unemployment checks and receiving the net benefit is most beneficial.  After talking to your accountant about what you should withhold, I’d encourage making those changes if necessary,” April said. “This is mostly a cash flow thing—unless you have the ability to save for the tax liability later, it’s better to pay it up front.”

Is there a difference in paying taxes on unemployment checks versus paying my regular income tax?

“Both are subject to regular income tax and you should plan accordingly so you are not caught off-guard with a large tax bill,” April said.

What are the different unemployment tax considerations for W-2 versus 1099 workers?

“Unemployment taxation is treated the same whether the individual is treated as a W-2 or 1099. On a related note, almost 99% of 1099 workers are really W-2 workers that are misclassified. The IRS is watching this closely,” April said.” To learn more about the difference between W2 and 1099 classification, click here.