Program Manager Technical Advice Memorandum 2018-015 (June 25, 2018)
Available at https://www.irs.gov/pub/lanoa/pmta_2018_15.pdf
The IRS Office of Chief Counsel has released a memo clarifying the tax and reporting consequences of an employer’s payment of federal income tax withholding and FICA (Social Security and Medicare) tax on taxable fringe benefits that were not included in wages or reported on Form W-2 for the year in which the employee received the benefits. The issues arose in an IRS employment tax examination of an employer that in 2016 failed to include $10,000 of taxable fringe benefits in an employee’s wages. The IRS examiners asked whether the employer’s payment of the federal income tax withholding and FICA taxes in 2018 would increase the employee’s 2016 income (and the employer’s tax liability), and if not, how the employer’s payments should be reported for 2016 and 2018.
The memo explains that the employer’s satisfaction of its FICA and income tax withholding obligations in 2018 does not create additional compensation or wages for the employee for 2016. The employee receives no credit for the employer’s belated payment of its income tax withholding liability, so the payment has no effect on the employee’s 2016 income tax liability. The employer must report the employee’s additional income for 2016 (the value of the taxable fringe benefit) on Form W-2c, but that form must not report the employer’s payment as federal income tax withheld, or increase the employee’s wages because of the employer’s payment. The memo notes that if the employee files an amended return and pays the federal income tax due for 2016, the employer may be eligible for an abatement of the amount it paid as income tax withholding (so the tax would not be paid twice).
With respect to the employee’s portion of the 2016 FICA tax, the memo explains that the employee receives credit for the employer’s payment of that tax, so the fringe benefit income must be reported on Form W-2c as Social Security and Medicare wages for 2016, and the additional employee FICA tax paid by the employer must also be reported. If, after paying the employee’s FICA tax in 2018, the employer collects the amount of the payment from the employee (e.g., by deducting it from the employee’s other remuneration), the employer’s payment is not additional employee compensation in 2018. But if the employer does not seek repayment, the payment is additional 2018 wages. The employer can either withhold FICA and income tax on these additional wages, or gross up the employee’s FICA and income tax withholding for 2018 in accordance with IRS guidance.
EBIA Comment: This memo highlights the difference between the federal tax liabilities of employers and employees. If an employer satisfies its federal income tax withholding obligation in a later year, there is no benefit to the employee. (A footnote in the memo rejects the conclusion reached in an earlier IRS memo that an employer’s payment of its income tax withholding liability in a subsequent calendar year would be additional compensation to the employee.) When the employee files an amended income tax return, there will be no credit for the employer’s payment, leaving the employee to pay any tax due on the additional income. By contrast, employees receive credit for an employer’s payment of the employee portion of the FICA tax, assuring that their earning records (and their future Social Security and Medicare benefits) accurately reflect their earnings. Program Manager Technical Advice memos provide legal advice to IRS national program executives and managers. While they cannot be used or cited as precedent, they are helpful in determining the IRS’s position. For more information, see EBIA’s Fringe Benefits manual at Section II.F (“Tax Basics for Fringe Benefits: Employment Taxes”). See also EBIA’s Cafeteria Plans manual at Section XXXVII.H.2 (“Too Much Salary Withheld; Error Found After Year-End”).
Contributing Editors: EBIA Staff.