Rev. Rul. 74-75

Advice has been requested as to the Federal income and employment tax consequences when, under the circumstances described below, an employer incurs liability for payment of the employee tax imposed by section 3101 of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954) without deducting the amount of the tax from the compensation of the employee.

At the beginning of the calendar year 1972, X Company hired A to perform certain services for it as an employee at a stated remuneration of $100 per week. In addition, X agreed to pay A's employee tax imposed by section 3101 of the Federal Insurance Contributions Act without deducting it from A's pay. For the year 1972, X paid A $5,000 and, in addition, incurred liability for the taxes imposed on A by section 3101 of the Act totalling $260 without deducting those taxes from A's remuneration. (During 1972 the total employee tax imposed by section 3101 was 5.2 percent of "wages.")

For purposes of section 61 of the Code, relating to the definition of gross income, A's gross income for 1972 from the employment described, under the specific agreement and the stated facts, included both his remuneration of $5,000 and the amount of employee tax due with respect to this remuneration, or a total of $5,260. Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929), VIII-2 C.B. 222 (1929).

The employee tax liability incurred by the employer was also "wages" for purposes of income tax withholding. Section 31.3401(a)-1(b)(6) of the Employment Tax Regulations. However, section 3121(a)(6) of the Federal Insurance Contributions Act provides that the term "wages" for purposes of that Act, does not include "the payment by an employer (without deduction from the remuneration of the employee)--(A) of the tax imposed upon an employee under section 3101 * * *." Therefore, for purposes of the Federal Insurance Contributions Act, no additional tax was applicable to the employee tax liability incurred by the employer for the employee.

In reporting the facts with respect to employee A and in presenting him with evidence to present the facts to the Internal Revenue Service, the employer properly indicated on the Form W-2, Wage and Tax Statement, prepared with respect to A, that the "wages" paid subject to income tax withholding in 1972 were $5,260, and that the employee tax withheld for purposes of the Federal Insurance Contributions Act was $260. Assuming that it was otherwise appropriate, employer X properly deducted $5,260 as ordinary and necessary business expenses under section 162 of the Code.

If the employee tax liability incurred for A were part of a total section 3101 tax liability incurred on his behalf for the calendar year, by two or more of his employers, on an amount in excess of the annual limitation on employee's wages subject to the Federal Insurance Contributions Act taxes under section 3121(a)(1) of the Act ($9,000 in 1972), A would be entitled to a special refund of the excess tax paid, under section 6413(c)(1) of the Code. That section indicates that the refund is conditioned upon the tax being deducted from the employee's wages. Since the tax liability incurred on behalf of A in this situation was included in his gross income, it was, in effect, deducted from his remuneration.

In the case of an employer who paid the Federal Insurance Contributions Act employee tax, but inadvertently failed to deduct it from the employee's remuneration, the employee's gross income would not include the amount of the employee tax if, upon discovery of the mistake, the employee reimbursed the employer or the employer deducted such employee tax from subsequent remuneration paid to the employee. In addition, for purposes of the special refund of any excess tax under section 6413(c)(1) of the Code, the situation would be treated as though the employer had properly deducted the employee tax from the employee's remuneration.

I.T. 3154, 1938-1 C.B. 113, is superseded.