Is strike pay taxable? What it means for UAW members and others.
After you've lost a string of paychecks during a lengthy strike, the last thing you want is to be surprised to discover that you owe taxes when you usually get a federal income tax refund.
But workers who received strike pay during the United Auto Workers' strike at the Detroit Three automakers and other work stoppages need to brace themselves for some tax headaches when they file their 2023 tax returns next year.
On Wednesday night, the UAW announced a tentative agreement at Ford Motor, which will be voted on by all UAW members at Ford. UAW leadership called all Ford workers to go back to work while the vote takes place, as a way to put pressure on Stellantis and General Motors to reach agreements.
So, is strike pay taxable? Yes, strike pay is taxable both on the federal level and on Kentucky income tax returns.
Even so, figuring out how your strike pay could drive up your tax bill isn't straightforward. Much will depend on whether you're single or married, your tax rate, whether you have dependents and how much you're having withheld in federal taxes from regular paychecks.
How strike pay hits taxes
It's important to run through the numbers now — or at least consider the hit that strike pay could take on your future tax bill.
"Strike pay is generally taxable, as all income is," said Mark Steber, chief tax officer at Jackson Hewitt Tax Service.
"There have been some attempts to call it a gift from various unions. These attempts generally fail."
Over time, Steber said, strike pay can add several thousand dollars in taxable income that might push up someone's tax obligations when filing a 2023 tax return next year.
Could tax rules change?
Some are advocating for revising the tax rules to protect strike pay from income taxes. But don't bet that any such effort will reduce your tax bill when you file a 2023 return next year.
U.S. Rep. Shri Thanedar is proposing amending the Internal Revenue Code to exempt strike pay from the individual gross income tax.
"Our current tax system punishes workers for standing up for their rights," the Detroit Democrat said in a statement.
The proposed change would effectively set the tax rate on strike pay to 0%. U.S. Rep. Rashida Tlaib, D-Detroit, is a co-sponsor. But the Picket Line Protection Act is unlikely to get far in a GOP-controlled House. The legislation is viewed as a nonstarter amid other fractious issues currently facing Congress, including a possible government shutdown in November.
More: UAW wants pensions restored as members worry if 401(k) will be enough to retire
Tax hit from strike pay will vary
On the one hand, a lengthy strike in 2023 means a loss of regular pay, which could push you into a lower federal income tax rate.
But if you've picked up other work or made a move like selling stock at a gain, your tax rate might not be lower. The same could be true if a striking UAW worker is able to pick up overtime hours in November or December, as some expect could be the case, if contracts are reached and ratified soon.
For UAW workers at the Detroit Three and elsewhere, strike pay can add up significantly at $500 a week.
The amount of strike pay received each week varies based on the union.
For those represented by the UAW, strike pay is set by the UAW constitution for all UAW strikers at $500 a week. That's up from the $250 a week that UAW workers received during the 40-day strike at General Motors in 2019.
At $500 a week, you’re looking at $3,000 in taxable income after six weeks on strike. Some auto workers on strike that long could be looking at $330 to $660 in federal taxes owed on their strike pay. But not everyone will see the same impact when they file their 2023 tax return next year. Much varies based on an individual's tax situation.
Much will vary, too, based on how long you've been on strike.
The UAW strike at the Detroit Three has been most unusual as it phases in strike hot spots. The first walkouts were Sept. 15 at just three assembly plants — the Stellantis Toledo Assembly Complex, the Ford Michigan Assembly Plant in Wayne and the General Motors Wentzville Assembly in Missouri.
The so-called Stand Up Strike then added 38 GM and Stellantis facilities across the country, including the GM Lansing Redistribution Center, the MOPAR parts warehouses in Center Line and Warren, and others in Michigan, Sept. 22.
Others were added later, too. On Oct. 23, for example, the UAW expanded the strike to include the Stellantis Sterling Heights Assembly Plant, which builds Ram light-duty pickups.
Before the tentative agreement at Ford was announced Wednesday, more than 45,000 UAW autoworkers were on strike at 46 factories and facilities across the country run by GM, Ford and Stellantis, which owns the Jeep, Ram, Chrysler, Dodge and Fiat brands.
Some taxing examples for those on strike
I asked tax professionals to create simple examples for how much you might owe in taxes on strike pay for an autoworker who might make $28 or $31 an hour and worked most of 2023 but was on strike six weeks.
Given the wages of autoworkers, a single person with no children could see that strike pay falls into the 22% tax bracket, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
And someone in the 22% tax bracket, he said, would owe $660 in federal taxes on $3,000 in strike pay.
On 2023 federal income tax returns, the 22% rate applies to single individuals with incomes over $44,725 through $95,375.
A married worker on strike who files a joint return could be looking at a 12% tax rate on $3,000 in strike pay — or an additional $360 in federal income taxes, Luscombe suggested.
On the 2023 federal income tax return, a married couple filing a joint return would be dealing with a 12% tax bracket when their taxable income is in the range of $22,000 to $89,450. The 22% rate hits married couples filing a joint return once the taxable income is above $89,450 through $190,750.
Luscombe's scenario did not take into account any wage increase, which clearly would be part of new UAW contracts at the Detroit Three based on the disclosed offers.
But Luscombe's scenario did reflect the possibility of a signing bonus at the Detroit Three, perhaps around $5,500. Taxes are withheld from a bonus but the extra income could influence your tax rate. (The tentative agreement announced Wednesday night at Ford calls for a $5,000 ratification bonus.)
Luscombe's scenario included the possibility that the worker might make overtime of $2,000 in 2023. Workers would have taxes withheld as they go on future wages, too.
Two big problems exist when it comes to strike pay.
First, taxes are not withheld from strike pay. The tax bill keeps climbing, the more weeks someone is on strike and receiving strike pay.
Second, many — particularly those who haven't received strike pay in the past — incorrectly hold some hope that, surely, strike pay couldn't possibly be taxable. And they're stunned come April.
"Unless they have been through this in the past, they may be surprised to find out that they may owe the IRS," said Matt Hetherwick, director of individual tax programs for the nonprofit Accounting Aid Society in Detroit.
Hetherwick, who ran some potential tax scenarios, agreed that many autoworkers on strike might be seeing their strike pay fall into a 22% tax rate. But he stressed that how much that would cut into your potential refund — or drive up what you'd owe — will depend greatly on how much you've had withheld in taxes out of your regular paycheck.
"Under withholding will cause more people to owe than any other single reason," Hetherwick said.
Sometimes, people already don't have enough money withheld in taxes each week from their regular paychecks. Going on strike, and collecting strike pay, could magnify that situation.
Assuming a correct withholding, a single auto worker who made $60,040 in 2023 — including wages and six weeks of strike pay — could owe $190 in federal income taxes, based on one calculation Hetherwick ran. That same person might have had a small refund of $15 if the individual had worked the full 52 weeks.
A married couple filing a joint return without any dependents, Hetherwick said, might still have a refund of $1,720 in a similar scenario but that refund would be $1,030 less than it would have been with 52 weeks of work.
Some families with dependent children would qualify for the child tax credit, which could help shore up their refund, too.
"A lot of variables can impact your tax outcome," Hetherwick said.
Right now, Hetherwick said, it's important to recognize that strike pay is taxable. If able, you'd want to try to set aside some of that pay to be used to cover any taxes owed in the future.
It's hard to advise someone, he admits, to set aside 20% of a $500 check for strike pay — or $100 or so — to cover taxes when their incomes are already far lower than if they were working.
At the same time, though, those on strike could try to prepare to file their taxes early in 2024 to get a clear picture on what they owe. They'd have until April 15, 2024, to pay the taxes owed.
On a positive note, Hetherwick said, strike pay is treated as earned income, which means that people are not looking at getting hit with self-employment taxes, even though strike pay is reported on a Form 1099-MISC. The self-employment tax rate is 15.3% — which breaks down to 12.4% for Social Security and 2.9% for Medicare.
The Internal Revenue Service spells it out: “Strike and lockout benefits. Benefits paid to you as strike or lockout benefits, including both cash and the fair market value of other property (other than bona fide gifts), are generally taxable to you."
The UAW website notes that after $600 in strike pay is received in one year, the UAW will issue individual members a IRS Form 1099-MISC.
Workers who were on strike in 2023 will receive the 1099 paperwork in early 2024. They will want to save that 1099 and use the information to report their strike pay when filing their 2023 tax returns next year.
Strike pay is taxable when you file your Michigan state income tax return next year based on this year's income, according to Ron Leix, a Michigan Department of Treasury spokesperson. For 2023 income, the income tax rate in Michigan is 4.05%. On $3,000 in strike pay, someone could owe an extra $121.50 in state income taxes in Michigan.
Taxes aren't top of mind for someone who is juggling the grocery bills, the mortgage and utility bills when on strike. But simply ignoring the potential tax hit until you're dealing with your 2023 tax return next year won't help, either.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor.
This article originally appeared on Louisville Courier Journal: Is strike pay taxable? How those on strike could feel pain at tax time.
