When a company chooses to reduce its workforce, it may approach that reduction in a few different ways. How a company makes these staffing changes could result in different tax implications. Here are the major differences between a furlough vs. layoff and what they mean for your income and taxes.
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What is a furlough?
In the situation of a furlough, your hours and pay are temporarily reduced, but you're still an employee of the company. This could happen because the employer doesn't have enough work to be completed or may not have enough money to make payroll.
A furlough could result in not working at all for quite a while. For example, when the government doesn't pass a budget and runs out of money, furloughs could result in no work for days, weeks, or months.
Alternatively, a furlough can mean reduced hours during a workweek. For instance, an employer may furlough a full-time employee for a single eight-hour day per week. In this case, they would continue working four eight-hour days totaling 32 hours per week (and would only be paid for that time).
In some cases, you may continue receiving employee benefits such as health insurance during a furlough. Although, it's possible you may have to pay the portion of premiums out of pocket that usually come out of your paycheck.
What is a layoff?
Unlike a furlough, a layoff means you're let go from a company and are no longer employed by them. A layoff isn't the same as getting fired because it has nothing to do with your job performance. Layoffs are usually due to the company having a temporarily reduced workload or insufficient money to pay the bills.
Layoffs can be temporary or permanent, but you're not an employee during the time you're laid off. Consequently, you'll normally lose your employee benefits as well. That said, companies may extend benefits to you for a certain time frame, especially if they hope to re-hire you in the future.
Can I file for unemployment?
Unemployment systems and laws vary from state to state. If you're laid off, you usually qualify for unemployment if your job was your sole source of income.
However, furloughed employees may not always qualify. Whether you receive benefits depends on if you're fully furloughed or partially furloughed. Most states have income requirements to be eligible for unemployment benefits. If your furlough doesn't drop your income low enough, you may not qualify for traditional unemployment benefits.
Check your state's unemployment rules to see if you may be eligible for unemployment compensation. Once tax time rolls around, remember to report any unemployment benefits you receive as taxable income if your state requires it. You should receive form 1099-G for this purpose.
You may qualify for tax benefits based on a lower income
If your reduction in income from being furloughed or laid off is significant, you may qualify from the tax benefits of having a lower income.
Lower marginal income tax bracket
Income is withheld from your paycheck based on how you filled out Form W-4 and your anticipated income for the year. A lower income usually means you'll owe less federal income tax.
If you suddenly lose your income, you may end up falling into a lower marginal tax bracket. Since your federal income tax was withheld at a level that anticipated a full year of income, this could result in a federal tax refund when you file your tax return if your income doesn't return to normal quickly.
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Tax credits that have income phaseouts
While the Families First Coronavirus Response Act (FFRCA) does not offer many benefits to unemployed or furloughed workers, there are other tax options you may want to look into. Many tax credits and other tax benefits are only available to people with certain incomes. Once your income hits a specific level, those benefits start phasing out until you no longer qualify for them at all.
Based on your reduced income from a layoff or furlough, you now may qualify for some of these tax benefits you couldn't have qualified for in the past. In particular, you may want to look into the
- Earned Income Tax Credit,
- Savers Tax Credit,
- American Opportunity Tax Credit,
- Lifetime Learning Credit, and the
- student loan interest deduction.
Can the Families First Coronavirus Response Act (FFCRA) help?
The Families First Coronavirus Response Act (FFCRA) enacts two main benefits that help with changes in employment status due to the COVID-19 pandemic, but these benefits are focused on employers, not employees.
The Emergency Paid Sick Leave Act (EPSLA) offers workers of companies with fewer than 500 employees the ability to take up to 80 hours of paid sick time when they're unable to work due to reasons related to COVID-19. This includes caring for yourself and others. The Emergency Family and Medical Leave Expansion Act (FMLA) allows those unable to work or telework due to certain childcare needs to receive paid family and medical leave of two-thirds of the employee's normal pay, up to $200 per day and $10,000 in total.
Note: You must still be employed to take advantage of these benefits. If you're laid off or furloughed, you can't use the benefits of the FFRCA.
Now that you know the differences between a furlough vs. layoff, you can take action to put yourself in the best financial position possible.
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