Issue: A new IRS ruling says signing bonuses and early-termination payments are considered taxable wages.
Risk: Overlooking that decision can trigger compensation problems or IRS penalties.
Action: Take this ruling into account when withholding taxes and crafting bonus programs, settlements or other payments.
Sometimes, you need bigger bait to lure bigger fish. That's why many organizations use financial incentives, such as signing bonuses, to entice new employees. In the past, both sides won tax-wise because this add-on has been exempt from payroll taxes.
But in a stunning reversal of past guidance, the IRS now says that signing bonuses (and early-termination payments) are subject to FICA, FUTA and income tax withholding. So, your organization can no longer tilt the deal in its favor by loading up on such incentives.
Ruling 1: Signing bonuses. The first ruling clarifies that employment taxes must be paid, and income taxes withheld, on bonuses paid for signing an employment contract. (IRS Revenue Ruling 2004-109)
Ruling 2: Early-termination payments. The IRS now says that if an employer gives a severance or some other payment in exchange for canceling an employment contract early, that payment is treated as wages for purposes of employment tax and income-tax withholding. (IRS Revenue Ruling 2004-110)
Bottom line: When you craft settlements, bonus programs or other nonstandard payments to employees, you need to determine ahead of time whether they'll be taxable as wages. And, as the new ruling shows, the IRS takes a broad view of what constitutes wages. So, in most cases, payments relating to an employer-employee relationship will likely be deemed wages, for which you must withhold taxes.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips. If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.
The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/1151/revamp-employment-contracts-to-account-for-new-tax-rules "
- Don't leave yourself open to retaliation claims: Enforce work rules equitably for all employees
- Trying to avoid romantic trouble? Make sure transfer doesn't look like punishment
- Is a policy still a policy if it's not in writing?
- Carrots and sticks: 5 ways HIPAA limits wellness programs
- Are you a target for union organizing? 6 questions to ask