The welfare system was established in the 1930s to assist families devastated by the depression. The programs were criticized because their structure made it difficult for people to return to work. Entry-level jobs frequently did not pay enough to support a mother and her children but returning to work made the recipient ineligible for benefits. Tax reform efforts in the 1990s sought to restructure the welfare program to encourage participation in the workforce by supplementing minimal wages instead of withholding benefits when recipients returned to work. This raised the question of taxation on the limited income earned.
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Welfare programs are state-run programs funded by federal block grants through the Temporary Assistance to Needy Families (TANF) program. TANF grants require recipients to work at least part-time within two years of receiving benefits. Assistance is determined on a case-by-case basis and can be given in the form of food stamps, cash assistance to supplement pay, debt consolidation and housing assistance. Each state interprets these needs differently and administers its programs accordingly.
Taxable Income and Withholding
Income earned for work performed is generally taxable. Low-income workers, especially those with dependent children, may be eligible for supplemental assistance through welfare. Assistance payments are not taxable, nor are child-support or Social Security payments. If you receive welfare payments to supplement a small salary, you do not earn enough to pay income taxes and you may declare yourself exempt for the year. However, your employer must still withhold Social Security and Medicare taxes.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) helps low-income families stretch their dollars to meet expenses. It is intended to help families make the transition from welfare to sustainable work by supplementing low-income jobs while parents learn a trade or salable skill. Qualifying parents receive the EITC as a tax refund, even if they paid no income tax for the year. It is available to low-income, working parents supporting one or more children under the age of 18. Welfare and child support payments do not count as income in calculating EITC eligibility.
All people pay sales taxes for at least some purchases. Even states like Pennsylvania, that do not tax food and clothes, tax other necessities, such as shampoo and lightbulbs. Welfare recipients are subject to these taxes, just like everyone else.