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.
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.
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.
Why are stimulus payments, many which went to employed or retired people untaxed and these payment, to the less fortunate, taxed. Unfair!
Excellent question.
The stimulus checks are considered to be tax credits according to the IRS and aren’t considered as income.
I was in this boat. When you elect to have taxes withheld from your regular UI benefits, MN gives you one option: 10% for Federal and 5% for State. I didn’t end up owing Federal but I owe MN. I would have liked the option to increase my State W/H for this very reason.
My partner and I just did our taxes. I was employed the full year, she was furloughed and earning unemployment for part of the year. THANK GOODNESS we weren’t spending as much last year and much of the supplemental unemployment benefits ended up in savings, because I don’t know how we would have been able to afford the tax bill on the supplemental payments otherwise. On balance, my largest return to date was completely wiped out, and she owed another $1,000 on top.
I know a lot of restaurant servers who will not be so lucky. The State absolutely should have taken some action on this sooner to mitigate this four figure surprise bill. And they had better take some action now: implement the option for payment plans or something.