Summary of Federal Laws
Tax Issues Related to Employment
The term wages is defined as all remuneration for services performed by an employee for his employer with certain enumerated exceptions. The name by which the remunerations for services is designated is immaterial. Remuneration is wages even though at the time paid the relationship of the employee and employer no longer exists.
PLR 200720017 Release Date 5/18/07
This PLR involves an employer sponsored medical leave sharing program. Employees were allowed to share accrued hours of paid leave with other employees in need of more hours than they had personally accrued. Under the policy leave can be shared for medical emergency, caring for a spouse or child with a medical emergency, or extended time off due to death of a parent, spouse or child. This PLR holds that the leave time extended is taxable wages to the recipient, per Revenue Ruling 90-29, and the employee making the donation of leave time does not realize any income. An expansion of the program to allow donation to employees who experience catastrophic casualty losses would be found to be taxable wages to the donating employee as this type of donation does not fall under the scope of employer sponsored medical leave sharing. Rather, this type of donation would be governed by the assignment of income doctrine.
Revenue Ruling 2006-56 (November 13th, 2006) Excess per diem allowances
This ruling provides that where an expense allowance arrangement has no mechanism or process to track allowances paid and routinely pays per diem allowances in excess of the federal per diem rates without requiring actual substantiation of all the expenses or repayment of the excess amount, all payments made under the arrangement will be treated as made under a nonaccountable plan, and thus the entire amount of the expense allowances will be subject to income and employment tax.
Revenue Ruling 2004-110
Payments made to an employee in connection with the cancellation of an employment contract are wages unless the employee is able to show that there exists "clear, separate, and adequate consideration for the employer's payment that is not dependent on the employer-employee relationship and its component terms and conditions. This revenue ruling reverses earlier revenue rulings in which the IRS had concluded that these types of payments could be viewed as a relinquishment of contract rights by the employee, and not wages.
Incentive Bonuses and IRS Private Letter Ruling PLR 200601030 (release date 1/6/06)
This ruling concerns a Long Term Incentive Bonus Program for senior managers at a tax exempt scientific research organization. The program is itended to provide financial incentives to, and rewards for, eligible employees who make key contributions to core operations and the development of commercial uses for science and technology discoveries.
The IRS approved the program, which provided bonuses based on objective performance evaluations of each individual. The bonus was a percent of the employee's salary. No bonuses would be awarded if the total amount of remuneration, when the bonus was added in, would be unreasonable. The IRS National Office found that since the bonuses were intended to motivate senior level employees to achieve goals in keeping with the organization's 501(c)(3) mission, the bonuses would not jeapordize the tax exempt status of the organization.
Allum v. Commissioner, Filed July 20, 2005
The U.S. Tax Court held that both settlement payments and attorney's fees paid by an employer to the employee to settle a wrongful termination case constituted income to the employee under section 104(a)(2) of the tax code. When damages are received pursuant to a settlement agreement, the nature of the claim, and not the validity of the claim controls whether the amount is excludable. The exclusion from income for tort actions and damages are for physical injuries or sickness, and excludes settlement payments for emotional distress unless they are for medical care attributable to the emotional distress. In this case no part of the settlement amount was allocated to a personal physical injury, but rather damages for loss of a license under the Federal Housing Administration. The plaintiff owed tax on both the $500,000 settlement payment to the plaintiff, and on the $75,000 portion of the settlement that plaintiff paid to his attorney.
IRS Counsel memorandum dated Oct. 22, 2008 (released July 2009) titled Income and Tax Consequences and Proper Reporting of Employment -Related Judgements and Settlements. See also the McDemott, Will and Emery summary of the four step process for determining tax treatment of employment related settlement payments, i.e. is it a wage or non-wage payment. The memorandum also includes a chart that lists for each type of payment whether it is taxable income, should be treated as wages for FICA and income tax withholding, and whether reporting is required and what form to use.
updated 6/27/13 CCR