Academic journal article Journal of Accountancy

When Is a Wage Not a Wage? Reducing an Employer's Withholding and Employment Tax Liability

Academic journal article Journal of Accountancy

When Is a Wage Not a Wage? Reducing an Employer's Withholding and Employment Tax Liability

Article excerpt

Not all payments to employees from employers are wages. If remuneration is not wages, an employer may be able to withhold less income tax, pay reduced employment taxes and accrue fewer retirement benefits. Thus, it is important for CPAs to understand the situations in which payments to workers may not be wages and such payments' effect on these obligations and benefits.

DEFINING THE ISSUE

Generally, wages are treated similarly for purposes of income tax withholding and employment tax obligations. IRC sections 3121(a) and 3306(b) broadly define wages for employment tax purposes as "all remuneration for employment." The definition under IRC section 3401(a) is essentially identical for income-tax-withholding purposes. The question is: Which payments fall outside the definition of wages? If payments are not wages, the employer incurs no legal obligation to withhold or pay employment taxes.

IS IT WAGES?

For payments to be wages, they must be remuneration for services the employee provided to his or her employer and therefore subject to FICA (for example, Social Security and Medicare) taxes. What remuneration for services is actually called and the basis on which it is paid are immaterial to classification as wages. Further, the employment relationship need not exist at the time it is paid.

CATEGORIZING PAYMENTS

The following are examples of the types of payments that may or may not be wages: payments made to involuntarily dismissed employees, settlements involving more than a single claim for damages, claims released in a termination agreement, attorney's fees and reimbursements of employee business expenses. …

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