It is the making of fantasies or of nightmares, depending on your personality. You go to check your battered bank balance and notice there has been a $600 payment from the Pennsylvania Department of Labor and Industry you were not expecting. In fact, on closer inspection you realize it is a mistake, you have been overpaid. This, of course, is not only a figment of my imagination, it happens often enough. After all, the Pennsylvania Unemployment Compensation program has to deal with thousands of claims, a mistake here and there is to be expected.

The big question is what are you going to do? The issue of government overpayment of benefits seems to be view on a moral par to finding money on the street. Nobody seems to be a victim of this overpayment, unless you count all taxpayers, so is it really that bad to keep it and keep quiet. The moral dilemma seems to be pretty straightforward: it isn’t your money and our near-bankrupt unemployment compensation program can’t afford to give out bonuses. But the question many of our reader have been asking is: what if I don’t pay it back?

That was the question posed by one of our readers: “What If I do not pay back an overpayment? What can happen to me?

There are three types of overpayments. One of them you don’t have to pay back.

 Fault overpayments occur when you receive more benefits than you should because you provide misleading information to the unemployment compensation program, in other words, because you lie. Not surprisingly, you must repay fault overpayments. If you don’t pay it within 15 days of being notified, you will start to owe interest on the overpayment. If you insist on not paying, a lien may be placed on your wages, if you are back to work, or on your benefits. In addition to this, the Pennsylvania Unemployment Compensation law allows the for the conviction of people who provide false statement or who knowingly withhold information to obtain or increase their benefits. If found guilty, you could be fined up to $1,000 or spend up to 30 days in prison, or both if you are really lucky. Further, you will be required to repay any benefits you were not entitled to.

Non-fault overpayments occur when the Pennsylvania unemployment compensation program pays you more than they should through no fault of your own. These must also be repaid. However, you have two options: to repay it voluntarily through a check or money order, or to get it discounted from any future benefits during the next three-year period. These deductions cannot exceed a third of your weekly benefits, although if the overpayment is less than $100 it will be deducted in full the first week.

Non-fault non-recoupable overpayments occur when you are overpaid because the unemployment compensation program changes its mind on your eligibility, determines the wages you earned do not meet the definition of employment or you receive holiday and vacations pay you did not know about. In these cases, you do not have to repay the overpayment and they wont be deducted from any future benefits. However, the unemployment compensation program will accept voluntary repayments.

Ever wondered how unemployment benefits work in Pennsylvania. If you look at your paycheck, you probably did not see any deduction toward unemployment insurance, so who pays for your benefits when you are unemployed? Many workers think this is paid through our federal and state taxes. However, state unemployment insurance benefits are not paid by either federal or state taxes. Federal unemployment benefit programs, such as the Emergency Unemployment Compensation program and the Extended Benefits are. So what about Pennsylvania’s state unemployment insurance benefits, who pays the bill?

Employers do, and in extreme cases employees contribute a little too. However, in most cases the entire cost of the unemployment insurance program in Pennsylvania is paid by employers.  All employers in Pennsylvania are required by Pennsylvania Unemployment Compensation law to withhold employee contributions toward unemployment insurance based on a trigger mechanism which only requires workers to pay unemployment insurance tax if the funds in the program drops to certain levels.

Note that in principle the program is designed to be funded entirely by employers. The employee contribution amendment was designed to ensure the Unemployment Compensation fund never dropped to dangerously low levels due to unpredictable economic changes.

How does the trigger mechanism work?

According to the 1988 amendments to the Pennsylvania Unemployment Compensation law, the trigger mechanism is based on the fund levels of the program. These are calculated every July based on the average benefit costs of the last three fiscal years. As of 2008 to 2012 these are the trigger levels.

If the fund has 150% or more of the average benefits cost for the last three years, employers will pay 0.0% of their wages. If 125% but less than 150%, 0.0%. If 110% but less than 125%, they will pay 0.02% of their wages, and so on, following the data below.

95% but less than 110% = 0.03%

75% but less than 95% =  0.06%

50% but less than 75% = 0.08%

Less than 50% = 0.08%

Note that as the unemployment insurance withholding tax for employees rises so does the unemployment compensation tax for employers. For instance, according to the trigger mechanism, if the fund drops to 75 percent of the average benefits cost, employers must increase their contribution by 0.25 percent, if less than 50 percent, they must increase it by 0.45 percent  and if less than 50 percent, they must increase it by 0.65 percent.

Paying taxes is forever, even when you are unemployed. If you thought the only silver lining on unemployment is not to have to worry about preparing your tax return, think again. All unemployment benefits are taxable and must be declared in your tax return to your state and the Internal Revenue Service.

This is not news to most of our readers. However, some have asked about how to go about requesting forms and the documents they need to fill in their tax returns. Take for instance this question from Daniel Thomas: “How would I go about getting a copy of a form 1099-G from PA Unemployment?”. Excellent question Daniel. In fact there are many tax-related questions we have received from our readers lately so we have prepared a special article on unemployment and taxes. I know, combining taxes with unemployment regulations is probably the most dull theme on the web, but when you are on unemployment benefits and every dollar counts it is important to know where you stand with the taxman. Click here for a direct link to the Pennsylvania Department of Labor and Industry or read below for a summary of the subject of taxes and your Pennsylvania benefits.

1. How do I obtain a Form UC-1099G?

Click to access the Taxation of UC Benefits page and follow instructions.

2. What if I receive a Form UC-1099G with an incorrect amount in "Total Payment" or "Tax Withheld" areas of the form?

For income tax purposes, UC benefits are reported in the calendar year in which they are paid, regardless of when the application or claim for benefits was filed.

If you believe the "Total Payment" or "Tax Withheld" on Form UC-1099G is incorrect, please contact a UC Service Center 7 a.m. to 8:30 p.m. Monday through Friday and Sundays 7 a.m. to 2:30 p.m. or the Claims Information Center at (717) 783-3140, Monday through Friday, 7:30 a.m. to 4:30 p.m. All payments made to you and amounts withheld will be recalculated and compared to the amount on your Form UC-1099G. If the amount is incorrect, an amended Form UC-1099G will be issued.

3. What happens if UC benefit checks were returned and re-deposited into my account after the original Form UC-1099G was mailed to me?

An amended Form UC-1099G must be issued. You may contact a UC Service Center 7 a.m. to 8:30 p.m. Monday through Friday and Sundays 7 a.m. to 2:30 p.m., or the Claims Information Center at (717) 783-3140, Monday through Friday, 7:30 a.m. to 4:30 p.m. Your social security number and mailing address will be verified before an amended Form UC-1099G will be issued.

4. What if I receive a Form UC-1099G after I have filed my federal income tax return with the IRS?

Any questions concerning any adjustments that need to be made on your federal income tax return should be directed to the IRS at 1-800-829-1040.

5. What if I received an overpayment of benefits in one year and I repaid any of it in the same or subsequent calendar year?

Note: The "total payment" section on your UC-1099G form includes all benefits paid to you during the calendar year, including benefits that were applied to an overpayment.

For more information on how to report your repayment of UC benefits on your tax return, see Unemployment Benefits and Repayments in IRS Pub. 525 or contact the IRS directly at 1-800-829-1040.

6. What do I do if I believe the UC benefit check(s) were not cashed by me, or were cashed without my permission?

To start an investigation, contact a UC Service Center 7 a.m. to 8:30 p.m. Monday through Friday and Sundays 7 a.m. to 2:30 p.m., or the Claims Information Center at (717) 783-3140, Monday through Friday, 7:30 a.m. to 4:30 p.m.

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