Is Strike Pay Considered Taxable Income by the IRS?
Understand the unique tax implications of receiving strike pay. The IRS considers it taxable income, but the rules differ from those for regular wages.
During a labor strike, a union may provide financial support to its members who are not receiving their regular paychecks. This support, known as strike pay, is drawn from a fund established by the union for this purpose. The payments are intended to help striking workers manage their essential living expenses, such as housing and food, during the work stoppage. These funds serve as a partial replacement for lost wages, enabling them to sustain their participation in the strike.
The Taxability of Strike Pay
The Internal Revenue Service (IRS) considers strike pay to be taxable income. This is based on the broad definition of gross income, which includes “income from whatever source derived.” The IRS views these payments as compensation, not tax-free gifts. The reasoning is that the funds are not provided out of “detached and disinterested generosity,” a key characteristic of a gift, but are instead given because of an individual’s union membership and adherence to strike rules.
This tax treatment was solidified by the Supreme Court’s decision in United States v. Kaiser. The court concluded that the payments were income because they served the union’s interests by enabling the strike to continue and were provided systematically, not based on charity. Unless a union can demonstrate that payments are truly gifts based on individual need without conditions, all strike benefits are subject to federal income tax.
Tax Reporting for Strike Pay
The process of reporting strike pay involves responsibilities for both the union and the member. If a union pays an individual $600 or more in strike benefits during a calendar year, it is required to report these payments to the recipient and the IRS. The union fulfills this obligation by issuing Form 1099-MISC, Miscellaneous Information, reporting the total amount in Box 3 for “Other Income.”
When a striking worker receives a Form 1099-MISC, they must report this amount on their personal income tax return. The income is reported on Schedule 1 of Form 1040 on the line for “Other income.” This ensures that the strike benefits are included in the taxpayer’s total gross income for the year.
Withholding and Payroll Tax Rules
Unlike regular wages, federal income tax is not automatically withheld from strike pay. This can result in a tax liability when they file their annual return. To manage this, a member can make voluntary estimated tax payments to the IRS throughout the year to cover the anticipated tax.
A significant distinction for strike pay is its exemption from FICA taxes, which are the payroll taxes that fund Social Security and Medicare. The IRS does not classify strike benefits as “wages” for services performed for an employer. Because the payments come from the union and not an employer in exchange for labor, they are not subject to these specific taxes.
Taxable strike benefits are not limited to cash payments. If a union provides non-cash assistance, such as paying for groceries or rent directly on a member’s behalf, the fair market value of these goods and services is also considered taxable income. The value of this assistance must be included in the total reported on Form 1099-MISC and subsequently on the member’s tax return.