What are Supplemental Unemployment Benefits?
Supplemental Unemployment Benefits, also briefly called SUBs, are private funds set aside by the employer to provide additional unemployment compensation to employees in case of lay-off or termination not due to the employee’s own doing or reasons.
A SUB usually emanates from an agreement between the employer and a labor union during a labor dispute negotiation, wherein a trust fund will be organized and put up as part of employer-union agreement. Employers will then contribute regularly to the special unemployment fund, based on a specifically agreed amount computed on per-hour and per-employee bases.
Similar to the Federal-State Unemployment Compensation benefit, employees who were terminated for good cause or who voluntarily resigned from the company are not eligible as recipients of supplemental unemployment benefits.
In addition, payment of SUB to a laid-off worker will not affect the employee’s eligibility for state unemployment compensation benefits; hence, its essence as supplemental or additional unemployment assistance in case of involuntary separation from the company is upheld.
Most of the essential information that employees need to know about supplemental unemployment benefits are tax related, as determinant to the unemployed worker’s tax liability in receiving SUB payouts.
Distinguishing SUB from Unemployment Compensation (UC) Benefit
Supplemental unemployment benefits are different from unemployment compensation in terms of administrator and tax liability. Whereas UCs are collected by the federal and state governments in the forms of taxes, the SUBs are put up as trust funds managed by the employer.
Another point of emphasis is the matter of distinguishing supplemental unemployment benefits from extended unemployment benefit. SUBs should not be confused with the Extended Unemployment Benefits, inasmuch as the latter are additional federal financial aid derived from Unemployment Compensation fund programs implemented through the Federal Unemployment Tax Act (FUTA). The granting of extended federal aid to eligible unemployed employees has to meet certain conditions and requirements.
The confusion of what is currently regarded today as supplemental unemployment benefits could be attributed to the previously extended supplemental benefits during the 1970s and the 1980s, which were temporary in nature and have already expired. Today, to distinguish the additional benefits provided by the Federal government, they are specifically referred to by the title Extended Unemployment Benefits
Inasmuch as the confusion surrounding these two different types of benefits is related to the tax liabilities of the worker who receives the supplemental unemployment aid, the following sections clarify the conditions by which the SUB received by employees becomes taxable or non-taxable:
Clarifying the Tax Liabilities & Exemptions of SUB Recipients
The Employee’s Tax Obligations for SUBs
Supplemental unemployment benefits are basically taxable since they are derived from trust funds that were put up by the employers and no contributions whatsoever were collected from the employee during his term of employment. They qualify as wages subject to withholding tax and not as unemployment compensation.
Hence, employers are required by the IRS to deduct withholding taxes from the amount paid out to laid-off employees as supplemental benefits. This will be reported to the unemployed worker via the issuance of the W-2 form.
Nevertheless, there are conditions that qualify part of the SUB from tax exemption.
Conditions that Exempt SUB from IRS Tax Liabilities:
If the Supplemental Unemployment Benefits were derived from the following:
- A private trust fund where the employee voluntarily gave contributions;
Prior to making SUB payouts, employers must first deduct the employee’s total contributions to the supplemental unemployment fund to determine the net SUB shouldered by the employer. Thus the SUB received by the employee is in part subject to withholding tax computed on the net amount contributed by the employer.
- A supplemental unemployment fund arranged under the Trade Act of 1974, wherein employees are required to make repayments for the SUB received as a condition for trade readjustment allowances.
If the repayment is made within the same year the SUB was received, the recipient-employee merely deducts the amount of repayment made from the received SUB and only the difference will be reported as part of his gross income.
On the other hand, if the recipient-employee makes the repayment for the SUB on a subsequent tax year, the amount of repayment will be presented on Form 1040 as adjustment to gross income of the current tax year.
- A special union fund wherein the SUB recipient made contributions. The recipient union member merely deducts the amount of contributions made and reports the difference as part of his gross income for the year. However, for any SUB received as part of union benefits wherein only union dues were paid, the entire amount of the SUB received is taxable.
Conditions that Exempt SUB from Social Security and Medicare Tax Liabilities:
To qualify the supplemental unemployment benefit exempt from Social Security, Medicare, and FUTA tax purposes, all of the following conditions should be met:
- The SUB is for the benefit of laid-off employees.
- The employee has complied with all the conditions to qualify the person as eligible to receive the SUB.
- The SUB is not received in lump sum but will be paid out in the form of weekly benefits.
- The amounts of SUB weekly benefits to be received are in compliance with the same rules prescribed under the state unemployment benefits or similar compensation allowed under state laws; consideration for compliance includes the amount of regular weekly pay to be doled out.
- There is no prescribed period to be observed in the granting of the benefit.
- There are no task or service performances attributed as conditions to receive the benefits.
- There are no conditions that allow the employee to receive the benefits subject to pending compliance to the requirements for the person’s eligibility.
What Happens If Taxes are Not Withheld?
As an added note pertaining to the tax obligation or liability of employee for supplemental unemployment benefits, electing not to have withholding taxes deducted from the SUB received may render the recipient employee subject to computation of estimated tax. In addition, if the amount of tax paid is not in accordance with the corresponding withholding tax due or estimated tax computed, the recipient employee’s tax liability for the SUB received will increase as it becomes subject to penalties and surcharges.
Reference Materials and Image Credit Section
- Supplemental Unemployment Benefit Trusts — https://www.irs.gov/irm/part7/irm_07-025-017.html
- 418 – Unemployment Compensation — https://www.irs.gov/taxtopics/tc418.html
- 12. Other Income— https://www.irs.gov/publications/p17/ch12.html#en_US_publink1000172033
- SUPPLEMENTAL BENEFITS- Unemployment Compensation — https://www.policyalmanac.org/social_welfare/archive/unemployment_compensation.shtml
- Publication 15- A Supplemental Unemployment Benefits — https://www.irs.gov/publications/p15a/ar02.html#en_US_publink1000169544
- Panic1837- US Whig poster showing unemployment in 1837
- FEMA – 18388 – Photograph by Jocelyn Augustino taken on 11-03-2005 in Florida