Anytime a person receives income, tax usually must be paid on that income. Many people may not realize this also applies to unemployment benefits. If you fail to pay the state tax on your unemployment benefits, the local government may place a lien on your personal property.
What Is an Unemployment Lien?
A lien is a financial claim issued by state or federal government against the personal property of an individual who owes back taxes of one kind or another. When there is a lien against your personal property, all such property may be subject to seizure and sale by the government to obtain the money owed. This can include your home, car, wages, financial assets and any property obtained after the lien is issued.
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An unemployment lien could arise in two ways. First, it could be a type of tax lien, relating to unemployment benefits that you have not paid tax on when the tax is due. Second, it could relate to unemployment benefits that you were inadvertently overpaid and have not yet paid back. It is sometimes called an unemployment overpayment lien or an unemployment recoupment lien.
Consider also: Do I Have to File Income Tax on Unemployment?
Overpaid Unemployment Benefits
In many states, unemployment insurance is paid by the employer. This means that when someone receives unemployment benefits, they are issued without taxes being deducted unless that person has requested that tax be withheld.
Any income a person receives in a given year beyond a few hundred dollars is usually taxable by both state and federal government. Depending on the amount of back tax owed and the state in which you live, local government may be more or less aggressive about obtaining money due. However, note that an unemployment lien is not the same as a federal tax lien, as it is asserted by local government and no the IRS.
Strict Notification Procedure
An unemployment lien may be filed in the county in which a person works or lives or in any county in which property interest is held. Before a lien is issued, the liable person must be notified by the entity issuing the lien, usually in the form of a legal notice mailed to that person's place of work or home address.
Depending on the type of back tax owed and the state in which you live, a lien may be issued within 10 days of notification if no payment is made or after several unsuccessful attempts to collect the amount owed. The documentation you receive must state the type of lien, the amount of the lien, and the name of the state agency that's asserting it.
Consequences for Not Paying
It is important to meet a lien obligation as quickly as possible, because failure to do so could result in a loss of personal property. Once a lien has been paid in full, the court through which the lien was issued may record the lien as discharged. If the lien was reported to the credit bureaus and appears on your credit report, it may affect your ability to obtain a loan or other credit in the future. For information about lien procedures in your state, contact your state department.
Consider also: How Do Property Tax Lien Sales Work?