Estimated Tax Penalty and Interest Waiver for Individuals Who Received Unemployment Benefits in Tax Year 2020

Issued: February 9, 2021

This notice establishes an automatic waiver of all penalty and interest related to estimated taxes owed by individual income taxpayers who received unemployment benefits during tax year 2020.  

Estimated Payment Obligation. Section 301(1) of the Michigan Income Tax Act requires every person whose annual tax is expected to exceed $500 or more to make four equal installments of estimated tax.[1] The requirement to pay and the computation of each required installment is based on the annual tax due after deduction of any tax withheld during the year.[2] A taxpayer that fails to make a required estimate, underpays a required estimate, or pays a required estimate after the statutory due date is subject to penalty and interest as computed under the Revenue Act.  Under Section 23 of the Revenue Act, penalty may be imposed at 25% of the tax due for a failure to make a required estimate and imposed at 10% of the tax due for underpaying estimates or remitting estimates after the statutory due date.[3] The Revenue Act also provides that penalty for a failure to pay a required estimate may not be imposed if a taxpayer was not required to make an estimated tax payment in the immediately preceding taxable year; interest, however, remains due.[4] Taxpayers who are subject to either penalty or interest for the failure to pay or the underpayment of estimates can report the liability for penalty or interest by including Form MI-2210 Michigan Underpayment of Estimated Income Tax with the filing of the annual Michigan income tax return (Form MI-1040).[5]

Michigan Income Tax Treatment of Unemployment Benefits. State and federal legislation enacted throughout 2020 has generally expanded and thereafter extended the weekly unemployment benefit for many individuals. The receipt of unemployment benefits by an individual through the Michigan Unemployment Insurance Agency (UIA) is subject to income tax at both the state and federal levels. Although included in the Michigan individual income tax base, unemployment compensation is not subject to mandatory state tax withholding. Individuals receiving unemployment benefits received income taxable in Michigan for which no applicable Michigan income tax has been withheld and, as a result, may have been  required to remit quarterly estimated payments for the tax due on such income.

Unemployment Benefits and Estimated Payments. The estimated tax obligation under Section 301(1) of the Act is based upon the expected annual tax liability[6] after deduction of all state income tax withheld.  Sources of income not subject to mandatory tax withholding — such as unemployment benefits —  may result in the requirement to remit quarterly estimated tax payments under Section 301(1). For individuals who received expanded unemployment benefits throughout 2020, quarterly estimated tax payments may have been required to pay the resulting annual tax on such benefits received during the year. Those individuals may be subject to penalty and interest for failing to remit the required estimated tax if their tax liability after deduction of withholding and any credits exceeds $500. Although some individuals may not be subject to penalty because they were not required to remit estimated tax in the immediately preceding year, interest accruing on the unpaid estimates remains owed as reported on Form MI-2210.

Automatic Waiver of Penalty and Interest.  For many individual taxpayers, estimated tax payments are not typically required because sufficient tax is required to be withheld on income earned by that taxpayer. The receipt of unemployment benefits — a source of income not subject to mandatory tax withholding — therefore presents an estimated tax payment obligation not anticipated by many individuals when 2020 began. For these taxpayers, therefore, the Department is waiving penalty and interest related to the requirement to remit quarterly estimated tax payments. This waiver is applicable only to individuals who received unemployment benefits in tax year 2020. This waiver is applicable to both penalty and interest related to the estimated tax obligation under Section 301(1), including any penalty and interest for the failure to pay estimates, the underpayment of estimates, and the late payment of estimates.

The waiver is automatic. All taxpayers who received unemployment during the 2020 tax year will automatically receive the waiver provided within this notice. For purposes of filing the 2020 Michigan income tax return, taxpayers eligible for this waiver do not need to include a completed Form MI-2210 to report to the Department the amount of penalty or interest eligible to be waived. Because the waiver is automatic, there is also no need to contact or otherwise submit any additional documentation to the Department requesting that the waiver be applied.  

The automatic waiver within this notice is limited only to penalty and interest related to the quarterly estimated payment requirement established under Section 301(1) for an individual receiving unemployment benefits. Taxpayers whose underpayment of estimates was not due to the receipt of unemployment benefits in 2020  may be subject to penalty and interest related to estimated tax payments required under Section 301(1). These taxpayers should report any applicable penalty and interest owed by filing Form MI-2210 with their 2020 Michigan income tax return. Any penalty or interest otherwise levied on the 2020 income tax return is not eligible for the automatic waiver provided within this notice.

Unemployment Benefits and Tax Year 2021. The waiver in this notice does not relieve any taxpayer of the obligation to remit quarterly estimated payments for tax year 2021. Individuals who receive unemployment benefits during 2021 may be required to remit quarterly estimates if the annual tax liability after deduction of any withholding or available credits is expected to be greater than $500.[7] In lieu of remitting estimated payments throughout 2021, those individuals can elect to have state tax withheld by updating their account information with UIA.[8] The first quarter estimated tax payment for 2021 is due April 15, 2021.

Taxpayers with questions regarding this notice may contact the Department at 517-636-4486. 

 

[1] MCL 206.301(1),

[2] MCL 206.351.  Although estimates are generally paid on a quarterly basis throughout the tax year, by notice dated April 17, 2020, the Department announced that the quarterly payment due on April 15, 2020 was extended to July 15, 2020.  This notice can be accessed online at https://www.michigan.gov/documents/treasury/Notice_-_IRS_notice_2020-23_2Q__STATE_CONFORMITY_v2_687560_7.pdf..

[3] MCL 205.23(3)-(4).

[4] MCL 205.23(2). 

[5] The 2020 form is available online at https://www.michigan.gov/documents/taxes/MI-2210_711900_7.pdf. 

[6] The annual tax liability is determined after all available credits available to the taxpayer have been applied. 

[7] MCL 206.301(1). 

[8] For additional information on changing the tax withholding status on unemployment benefits through UIA, see https://www.michigan.gov/leo/0,5863,7-336-94422_97241_98585_98650-527741--,00.html.