At this very moment, there are approximately 85,000 employees on strike in the United States. Many of which are receiving strike pay from their Union, special interest group or caring billionaire. Strike pay has raised many an eyebrow at the Internal Revenue Service, because there is legitimate confusion about whether strike pay tax should or shouldn’t be paid.
To make matters worse, the IRS has had several public skirmishes with folks about this issue, and these fights have made their way into Union newspapers and websites. Unions, by definition, protect the little guy, so their newspaper language is often supercharged, which in turn scares the striking employee, perhaps even causing him to pay taxes where he shouldn’t, or unknowingly miss paying taxes where he should. To help clear this up, below I outline the three most likely strike pay examples and show you which of these creates taxable income and which is tax free.
The Nature of Strike Pay
Strike pay comes in three forms: a payment for all strikers, whether or not they belong to a union; a return of dues specifically paid into a union strike pay fund by the employee, or money for union employees from the savings account of the Union, not tied to any prepaid funding arrangements and not available to non-union strikers.
I. Tax on Strike Pay – “A Gift”
Let’s say that Bill Gates woke up this morning and read about the plight of the union worker at the Indiana Motorcycle Company (IMC) in Gary, Indiana. She works on a production line assembling engines for the company. Indiana Motorcycles, which has expanded internationally, just reported another great year. Revenue was up 10%, profit was up 11% and the management team increased the dividend payout by 10%, again for a third year in a row. At the same time, IMC announced a pay freeze and staff reduction to “stay competitive.” At the direction of the Union, the factory workers decided to go on strike. Both union workers and non-union workers went on strike because the issue affects them all.
Bill Gates looked at the situation and declared, “I will cover 50% of all salaries while these people fight the good fight. More importantly, they do not need to pay me back. I think what has happened is just wrong so I am giving them the money.”
In this, situation, the strike pay was a gift and is nontaxable like most other gifts (you don’t write a check to Uncle Sam at Christmas time, nor would you write a check here).
II. Tax on Strike Pay – Drawdown from the Strike Fund
Let’s change the fact pattern a bit. You work for the Indiana Motorcycle Company in Gary, Indiana and you are a Union employee that goes on strike. You are a member of the Teamsta’s Union and have been a member for three years. You pay union dues of $250 a month. $150 for a general union membership and $100 paid into a fund which can be used later in the event of a strike. Your total contribution to the strike-pay fund is 36 months X $100 = $3600. At the union’s direction, you and other members go on strike. A few non-union employees also go on strike.
On your first normal pay date, two weeks after you go on strike, you would have received $2700 before taxes, but your received nothing; however, the Teamsta’s paid all union members 50% of their normal pay – in your case $1350 for the two-week period. They continued to do this every other week for the entire six weeks that you were on strike. Your total pay from the Teamstas was $1350 X 3 two-week periods = $4050. Non-union members received nothing from the Teamstas.
Even though you paid only $3600 into the fund, you received $4050 over the period. Because you contributed $100 a month into the strike fund and you worked there for three years, you had accumulated $3600. This means that the first $3600 is considered a return of your own money and is not taxable, but the remaining $450 is taxable as normal income.
III. Tax on Strike Pay – Union Funds the Union Strikers Completely
Let’s change the scenario one more time. You pay $150 a month in Union dues and nothing to a Strike Fund. Indiana Motorcycle Company announces the pay freezes and staff reductions and union and non-union members both go on strike. Your Union, the Teamsta’s pay you $1000 a month, and non-union employees receive nothing (which makes sense because they are not a member of the union). Because this is paid to union members only and there was no strike fund account, 100% of the payout is taxable at normal rates.
Side bar, if the union, for whatever reason had given non-union employees an equal payment, then the Strike Pay would have been considered a gift and would be non-taxable. If they gave non-union members a smaller payment, then the difference between the union and non-union member payment would be taxable, but the amount that is paid equally to union and non-union employees would not be taxable.
If you have any additional questions or simply want to watch this on video, go to my YouTube channel, Holy Schmidt! here.