Military Pay and Exempt FICA / FUTA
This question is in regards to the FICA and FUTA exemption for employees who are on active duty in the military for more than 30 days. Once the employee exceeds the 30 days of active military duty is when payroll currently stops deducting for FICA and FUTA. I recently had a question asking if payroll should retroactively be going back and crediting FICA paid from the start of the active military leave once 30 days is reached. I don't see a clear answer to when the FICA becomes exempt in the IRS ruling? What are others doing? I have included a snippet from IRS ruling 69-136 below:
Internal Revenue Bulletin: 2009-18 | Internal Revenue Service
M, an employer, has employees who are called or voluntarily enlist for active military service in the United States uniformed services (as defined in chapter 43 of title 38, United Sates Code) for periods exceeding 30 days. M continues making payments to the individuals in an amount equal to the difference between the compensation they receive for their military service and the wages the employees would have received from M if the employees were performing services for M. The payments supplement compensation received by the employees from the Federal government for their military service.
LAW AND ANALYSIS
Income Tax Withholding, FICA and FUTA Treatment
Section 3402(a), relating to income tax withholding, generally requires every employer making a payment of wages to deduct and withhold upon those wages a tax determined in accordance with prescribed tables or computational procedures. Sections 3101 and 3111 impose taxes under the Federal Insurance Contributions Act (“FICA”) on employees and employers for wages paid with respect to employment. Section 3301 imposes tax under the Federal Unemployment Tax Act (“FUTA”) on employers on wages paid with respect to employment.
Section 3401(a) defines “wages” for income tax withholding purposes as all remuneration for services performed by an employee for his employer, subject to certain exceptions. Sections 3121(a) and 3306(b) contain similar, but not identical, definitions of wages for FICA and FUTA purposes.
Revenue Ruling 69-136, 1969-1 C.B. 252, addresses the tax treatment of payments made by civilian employers to their employees who are called to or enlist in active military service for an extended time period. The payments are made by the civilian employers during the period of active military service in amounts equal to the difference between the compensation paid by the military and the wages that would have been paid if the individuals were performing services for the civilian employer. The ruling holds that the payments are not wages subject to the taxes imposed by FICA or FUTA or to income tax withholding.
Revenue Ruling 68-238, 1968-1 C.B. 420, addresses the tax treatment of payments made by civilian employers to their employees who are temporarily absent from work while serving in a State National Guard. The payments are equivalent to the difference between the employees’ normal wages and the amounts received from the State for their services in the National Guard. The ruling holds that these payments are wages and are subject to FICA and FUTA taxes as well as income tax withholding.