Were regular and CARES Act unemployment benefits taxable in South Carolina in 2020, and could recipients withhold state tax?

Plain-English summary

As of June 12, 2020, South Carolina treated regular unemployment compensation and the expanded federal CARES Act benefits as taxable income to the same extent they were taxable federally.

The letter explained three CARES Act programs:

• Pandemic Emergency Unemployment Compensation (PEUC): up to 13 additional weeks after regular state benefits were exhausted.
• Federal Pandemic Unemployment Compensation (FPUC): an additional $600 weekly benefit for people receiving unemployment compensation.
• Pandemic Unemployment Assistance (PUA): benefits for people who ordinarily might not qualify, including independent contractors, self-employed people, business owners, and people with limited work histories who could work absent COVID-19. Employees who quit for COVID-19 reasons could also qualify.

Under I.R.C. § 85(a), unemployment compensation was included in federal gross income. South Carolina had adopted that rule, so the letter said the CARES Act expansions were also taxable for South Carolina income-tax purposes.

Recipients could elect to have 7% South Carolina income tax withheld from unemployment payments or could make estimated tax payments. Section 41-39-40(A)(5) allowed an individual to change a prior withholding election at least once.

Important later change for 2020

SC Information Letter #21-14 later modified this guidance after South Carolina adopted the federal partial unemployment-compensation exclusion for tax year 2020. Do not apply the original "fully taxable" statement to 2020 without accounting for that later change.

What this means for you

People who received pandemic unemployment benefits

PEUC, FPUC, and PUA were not automatically tax-free merely because they were emergency programs. The original letter treated them like other taxable unemployment compensation.

Independent contractors and business owners

PUA expanded benefit eligibility to categories that ordinarily might not receive unemployment benefits, but the letter did not create a separate South Carolina tax exemption for those recipients.

Taxpayers planning for a balance due

Withholding and estimated payments were the two methods the letter identified for covering the South Carolina tax during the year.

Common questions

Q: Did South Carolina tax the extra $600 weekly FPUC benefit?
A: Under the rule stated in this June 2020 letter, yes, because the expanded CARES Act benefits were taxable to the extent they were taxable federally. The later 2020 partial exclusion must also be considered.

Q: Could an unemployment recipient elect state withholding?
A: Yes, at the historical rate of 7% stated in the letter.

Q: Could the recipient change the election?
A: Yes, at least once.

Q: Is the letter's original fully taxable statement the final rule for 2020?
A: No. SC Information Letter #21-14 later modified it for tax year 2020.

Citations and references

• I.R.C. § 85(a)
• S.C. Code Ann. §§ 12-6-50(4), 12-6-3910, and 41-39-40(A)
• CARES Act §§ 2102, 2104, and 2107; Public Law 116-136
• S.C. Code Ann. §§ 12-4-320 and 1-23-10(4); SC Revenue Procedure #09-3

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/IL20-15.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214-0575

SC INFORMATION LETTER #20-15

SUBJECT:

Unemployment Compensation
(Income and Withholding Taxes)

DATE:

June 12, 2020

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

An Information Letter is a written statement issued to the
public to announce general information useful in complying
with the laws administered by the Department. An Information
Letter has no precedential value.

PURPOSE
Due to unprecedented closings of businesses during the Coronavirus (COVID-19) pandemic, the
number of individuals applying for unemployment benefits has significantly increased since
March 2020. The purpose of this Information Letter is to remind individuals of the taxability of
unemployment compensation and the option to elect withholding or make estimated tax
payments to reduce any potential tax payment due when filing next year’s South Carolina
individual income tax return.
OVERVIEW OF EXPANDED UNEMPLOYMENT BENEFITS
The federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) 1 significantly
expanded unemployment benefits for workers impacted by the Coronavirus (COVID-19)
outbreak. The Act provides for three new federal programs to supplement existing state
unemployment compensation plans.

1. The Pandemic Emergency Unemployment Compensation (PEUC) program 2 provides up
   to 13 additional weeks of benefits to individuals who have exhausted their regular state
   provided unemployment compensation.

1
2

Public Law 116-136, March 27, 2020.
Section 2107 of the CARES Act.

1

2. The Federal Pandemic Unemployment Compensation (FPUC) program 3 provides
individuals receiving unemployment compensation an additional $600 weekly benefit.

3. The Pandemic Unemployment Assistance (PUA) program 4 allows for unemployment
   benefits for those who ordinarily may not be eligible for unemployment benefits, such as
   independent contractors, self-employed individuals, business owners, and those with
   limited work histories, who would be able to work in the absence of COVID-19. In
   addition, employees who quit their job for COVID-19 reasons may qualify for
   unemployment benefits.
   OVERVIEW OF INCOME TAX AND WITHHOLDING ON UNEMPLOYMENT
   BENEFITS
   Taxation of Unemployment Compensation: Under Internal Revenue Code Section 85(a),
   unemployment compensation is included in gross income and is subject to federal income tax.
   South Carolina has adopted Internal Revenue Code Section 85. 5 Accordingly, to the extent that
   unemployment compensation is taxable for federal income tax purposes (including the expanded
   benefits provided in the CARES Act), unemployment compensation is also taxable for South
   Carolina income tax purposes. See also Code Section 41-39-40(A). 6
   Income Tax Withholding on Unemployment Compensation - Voluntary: An individual
   receiving unemployment compensation may elect to have South Carolina income tax deducted
   and withheld from unemployment payments at the rate of 7% or may choose to make estimated
   tax payments. 7 Code Section 41-39-40(A)(5) provides that an individual is permitted to change
   a previously elected withholding of income at least once.
   QUESTIONS
   For questions about unemployment benefits, including qualification, application, benefit period,
   and benefit amount, or electing withholding on unemployment compensation, see the South
   Carolina Department of Employment and Workforce (DEW) website at www.scdew.gov.
   For income tax questions, contact the Department of Revenue at 1-844-898-8542 (toll free).

3

Section 2104 of the CARES Act.
Section 2102 of the CARES Act.
5
SC Code Section 12-6-50 lists specific Internal Revenue Code (IRC) sections not adopted by South Carolina. Item
(4) provides that IRC Section 85(c), relating to unemployment compensation, is specifically not adopted in South
Carolina. IRC Section 85(c) formally provided that $2,400 of unemployment compensation was excluded from
gross income. Subsection (c) was repealed effective December 19, 2014.
6
Title 41, Labor and Employment, Chapter 39, Employment and Workforce – Protection of Rights and Benefits.
7
SC Code Section 12-6-3910.
4

2