Academic journal article Journal of Accountancy

Back Wages and Payment of FICA and FUTA

Academic journal article Journal of Accountancy

Back Wages and Payment of FICA and FUTA

Article excerpt

Wage earners generally are required to pay FICA taxes in the year they receive their wages, computed at the applicable rates for that year. Likewise, employers are required to pay both FICA (IRC section 3111) and FUTA (IRC section 3301) in the year the wages are paid, again computed at the applicable rates. Confusion has arisen over whether an employer should compute taxes on back wages at the rate in effect when the wages were paid or the rate in effect when they were earned.

The Cleveland Indians baseball team owed back wages to 22 players for amounts earned during 1986 and 1987. In 1994, under a grievance settlement agreement, the Indians paid the wages. They also computed and paid employment taxes on the back wages according to the 1994 tax rates and wage bases. They then sued for a refund, claiming the wages should be treated as paid in 1986 and 1987 when no additional FICA or FUTA would have been due (since the players already had earned the maximum taxable amounts in those years).

The district court and Sixth Circuit Court of Appeals agreed with the taxpayer. The government requested certiorari and the U.S. Supreme Court agreed to hear the case because of the different results reached by various appeals courts.

Result. For the IRS. Employers should withhold and pay taxes on back wages using the applicable rates and wage bases for the year the wages are paid. Sections 3111 (a) and (b) prescribe FICA tax rates applicable to "wages paid during" each year. Section 3301 sets the rates for unemployment taxes. IRC sections 3121(a) and 3306(b) set an annual ceiling on the wages subject to these taxes. Many questions in this and prior cases concerned the meaning of the term "wages paid." All of the cases referred to a 1946 case, Social Security Board v. Nierotko, 327 U.S. 358, 370, where back wages were seen as "paid" in the year earned to determine eligibility for benefits.

The Cleveland Indians made several different arguments in support of their case. First, they said the ruling in Nierotko undermined a "plain language" argument since that case was decided in spite of the seemingly plain language used in the code. The Supreme Court agreed.

The team's second point revolved around the theory that in order to achieve symmetry, the meaning of "wages paid" must be interpreted the same as in Nierotko. The Court rejected this argument because Nierotko concerned assessing benefits eligibility not taxes paid. …

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