Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has provided guidance regarding differential wage payments that employers voluntarily make to employees who are on active military service. The payments are intended to make up at least part of the gap between what the employees would make as employees, and what they receive as military pay.

  The guidance explains that differential wage payments made to an individual while on active duty in the United States uniformed services for more than 30 days are subject to income tax withholding, but are not subject to Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA) taxes. The amounts of the differential wage payments must be reported by the employer on the employee's Form W-2. Previously, the IRS had concluded that differential wages were not subject to income tax withholding.

  Since the differential wages qualify as supplemental wages, employers may use one of two methods to calculate income tax withholding on differential wage payments to an employee who receives no more than $1 million in total supplemental wages from the employer during the calendar year. Under the aggregate procedure, the employer adds the differential wage payment to the employee's regular wages, if any, for the payroll period and treats the aggregate of the two as if it constituted a single wage payment for the payroll period. The employer then calculates withholding from the differential wages in the same way it does for regular wage payments, according to the employee's Form W-4. Alternatively, the employer may use optional flat rate withholding, if the differential wage payment is not paid concurrently with regular wages or is separately stated on the employer's payroll records, and income tax was withheld from the employee's regular wages during the calendar year or the preceding calendar year. The current flat withholding rate for 2009 is 25 percent, but this could change. Finally, if the employer pays the employee more than $1 million in total supplemental wages during the calendar year, the withholding rate is the highest rate applicable (currently 35 percent).

 
Rev. Rul. 69-136, 1969-1 C.B. 252, is modified and superseded.

Rev. Rul. 2009-11, 2009FED ¶46,342

Other References:

 
Code Sec. 3401

  CCH Reference - 2009FED ¶33,506.195

  Tax Research Consultant

  CCH Reference - TRC PAYROLL: 6,058