We’ve known that the N.J. Department of Labor hasn’t been giving workers the opportunity to have federal taxes withheld from their $600 expanded federal unemployment payments.
Workers can have taxes withheld from their regular unemployment benefits. Just not from the $600.
New Jersey does not tax unemployment benefits, but the federal government does. Without the option to withhold taxes from the $600 payments, workers could be are looking at a federal tax bill of potentially hundreds or thousands of dollars, depending on how long they collect benefits and their overall tax situation. They could even be assessed underpayment penalties when they file their 2020 returns.
Labor Commissioner Robert Asaro-Angelo was asked why workers can’t withhold taxes from the payments last week during one of the governor’s briefings, and he gave a surprising answer.
“The reason why is we didn’t want to wait longer to get the money out,” he said.
We asked the Labor Department to expand on his answer.
A spokeswoman said adding the tax withholding option would have delayed "by several weeks the distribution of the much-needed $600 supplement. "
“Pandemic Unemployment Compensation (PUC) is a new federal program for which the states had to build the infrastructure, while maintaining security, to distribute these benefits in as timely manner as possible,” spokeswoman Angela Delli-Santi said in an emailed statement.
She said the agency is working to program the system to handle the tax withholding issue for those who want to elect withholding.
Delli-Santi said workers should "prepare accordingly when filing their taxes.”
She added that the agency distributed $1.9 billion in PUC benefits to N.J. workers as of May 16, “and was ahead of many states in getting these benefits into the hands of eligible unemployed workers.”
The U.S. Department of Labor said a number of states are having “technology challenges” in implementing tax withholding for the $600 payments.
If states are unable to withhold federal taxes, they must notify claimants that their $600 payments are subject to federal taxes — something New Jersey has done — and the state will issue a 1099G form at the end of the year, a spokesman said.
“The $600 FPUC is taxable. Therefore, states must include FPUC when preparing 1099Gs, and must, consistent with Section 3304(a)(l8), FUTA (26 U.S.C. §3304(a)(18)), withhold taxes from the weekly benefit amount and from the $600 FPUC, when an individual elects to have taxes withheld,” a U.S. Department of Labor advisory said.
WHAT CAN WORKERS DO?
It’s unclear whether there will be new laws and tax rules to address the issue, so based on current law, here’s what you need to know.
Much depends on your federal income tax liability.
If you will owe less than $1,000, you do not have to withhold taxes or make any estimated tax payments, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
You also will not have to pay any penalties, he said.
But if your tax is $1,000 or more, in order to avoid an underpayment penalty, you must pay through withholdings or estimated tax payments, or a combination of both.
Your withholdings and estimated tax payments must add up to either:
- 100% of your prior year’s income tax, or 110% of your prior year’s income tax if your prior year’s adjusted gross income was more than $150,000 for married couples who file a joint tax return, or $75,000 if your filing status for the prior year was married filing separately or single; or
- 90% of your current year’s federal income tax.
Before you have to pay any federal income tax, you have to earn more than the standard deduction, Kiely said. In 2020, the standard deductions are:
- Single/Married filing separately $12,400
- Married Filing Jointly $24,800
- Head of Household $18,650
So not everybody will need to pay estimated taxes, depending on their total tax situation. But for those who do, you may have to calculate your estimated tax. But how much?
Kiely said if you worked in January, February or part of March, hopefully you had the appropriate income tax withheld from your regular paychecks.
“If you received unemployment compensation, you could have requested that 10% be withheld for federal income tax,” he said. “The actual tax due is based on your marginal tax bracket for the entire year so it is possible 10% withholding is not sufficient.”
He said the 10% tax bracket — after your standard deduction — is for those who earn up to $9,875 for singles and up to $19,750 for married people who file jointly.
Those who started receiving the extra $600 benefit could get it weekly for a maximum of 17 weeks in N.J., from the week ending April 4, 2020 through the week ending July 25, 2020.
That’s an extra $10,200 of untaxed income for which N.J.'s Labor Department isn’t yet facilitating withholding.
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The law allows the IRS to waive underpayment penalties if “you didn’t make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty,” but it’s not yet clear that the pandemic would qualify.
Kiely said if you owe an underpayment penalty, you can calculate it by using IRS Form 2210.
If you need more help, contact your tax preparer.
And if you didn’t elect to have federal taxes — the flat 10% — withheld from your regular payment, you can go to your unemployment account and change that. It’s just not available for the $600 amounts.
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Karin Price Mueller may be reached at bamboozled@njadvancemedia.com.