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Minnesotans who got extra unemployment payments could see big tax bills this year

Minnesota did not withhold state or federal taxes from the $600 and $300 bonus unemployment payments, which are taxed as regular income.

People who lost their jobs waiting in line to file for unemployment benefits, during outbreak of the coronavirus disease, at the Arkansas Workforce Center in Fort Smith, Arkansas.
People who lost their jobs waiting in line to file for unemployment benefits, early in the outbreak of the coronavirus disease, at the Arkansas Workforce Center in Fort Smith, Arkansas.
REUTERS/Nick Oxford

In March of last year, Jen Fuller was working at both the Minneapolis Parks and Recreation Board and at Minneapolis Public Schools.

Then COVID-19 hit, and both positions were cut.

Like many Minnesotans who lost their jobs quickly at the pandemic’s start, Fuller was thankful to be able to get unemployment benefits quickly, with an additional $600 per week and later an extra $300 per week due to federal relief programs, which helped to cover bills. But almost a year later, she got some unexpected news as she did her taxes: she owed about $800 in taxes to the state of Minnesota, plus some federal taxes.

“I did [my taxes] early because I was hoping maybe for some sort of return. Then I started thinking about it, and I thought maybe if it’s close to zero, that might be ideal,” she said.

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Fuller was surprised that she owed money. When she’d filled out the paperwork for unemployment, she had requested money be withheld to cover taxes, which she thought would be enough.

When that wasn’t the case, she did some investigating, and learned that the state withheld state and federal taxes on the regular unemployment payments, but not the supplemental $600 and $300 unemployment payments that were disbursed as part of federal pandemic relief packages.

Many of the hundreds of thousands of Minnesotans who have filed for unemployment in the last year are likely in the same boat.

Moving quickly

Blake Chaffee, deputy commissioner of workforce services at the Minnesota Department of Employment and Economic Development, said that when the agency disbursed the supplemental unemployment benefits early on, it had to move fast and within an unemployment system Chaffee described as inflexible. To get the money out as quickly as possible, Chaffee said the department took some computer code written for a Great Recession-era $25 unemployment topoff payment and changed the values to match the $600 pandemic unemployment assistance payments and the $300 lost wages assistance payments.

“This is one of those things where in real time, we had to make a decision that it was either getting that money out the door as quickly as we could [or] with everything else that was going on in the world, with about a ten-fold increase in applicants … it would’ve taken quite a bit of time to get that done,” he said.

Chaffee said the department notified unemployment recipients via emails and letters that taxes would not be withheld for these payments, but said “I’m sure some folks certainly may have been surprised.”

Chaffee said DEED has heard sporadically from people in situations like Fuller’s. Minnesota Department of Revenue spokesman Ryan Brown said the agency has also received some calls on the subject.

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A spokesperson from the Internal Revenue Service said some people, many of whom were on unemployment for the first time this year, have been caught unawares that unemployment benefits were taxed at all. Some states have forgiven some or all state taxes on unemployment benefits, according to Forbes.

All of the pandemic-era financial intricacies have kept tax preparers particularly busy this year as tax day approaches, said Brenda Lowe, a certified public accountant in White Bear Lake.

Anyone who hasn’t done their taxes yet should know that unemployment, including the supplemental benefits due to the pandemic, are taxed at the same rate as income, she said.

Fuller said she’ll likely be OK and find a way to pay the tax bill, but others might not.

Especially at a time when people were overwhelmed and overloaded with information, notices about not having taxes withheld on the supplemental payments might not have caught people’s attention — or they may have assumed the payments weren’t taxed, like stimulus checks.

“It’s a little hard to keep track of what’s being taxed and what isn’t,” Fuller said.