IRS Issues Guidance on When Income
is Subject to FICA Taxes
[Excerpt from Revenue Ruling 2004-109]
Situation 1
Baseball Club negotiates an employment contract
with an individual player. It is the first contract between
the Club and the player. The contract provides that the
player receives a signing bonus if he reports for spring
training at the time and place directed by the Club. The
contract provides that the signing bonus is not contingent
on the player's future performance of services.
Answer
Under the facts
presented in Situation 1, the
individual receives the signing bonus in connection
with establishing the employer-employee relationship.
The individual does not provide clear, separate, and
adequate consideration for the payment that is not
dependent upon the employer-employee relationship and
its component terms and conditions. Thus, the signing
bonus is part of the compensation the Baseball Club
pays as remuneration for employment, making it wages
regardless of the fact that the contract provides that
the bonus is not contingent on the performance of future
services.
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Situation 2
An employer negotiates a collective
bargaining agreement (CBA) with a union representing a group of its
employees. The CBA will take effect on the "ratification
date," which is the date it is ratified by a majority of the
union members covered by the agreement. The CBA provides
that each employee covered by the terms of the agreement who
is employed by the employer as of the ratification date
receives a bonus.
Each such employee is paid the same amount regardless of
compensation, seniority, position and whether or not the
employee voted for ratification. In addition, each
eligible employee receives the payment even if the employee
had not performed services for the employer before the
ratification date. Finally, the CBA provides that the
payment is not contingent on the employee's future
performance of services.
Answer
Under the facts presented in Situation 2, the
employees receive the ratification bonus payments as part of a bargain
that establishes the terms and conditions of the employment relationship
with all of the employees covered by the CBA. The employees do not provide clear,
separate, and adequate consideration for the employer's
payments that is not dependent upon the employer-employee
relationship and its component terms and conditions.
The payments are part of the compensation the employer
pays as remuneration for employment. Thus, the ratification
bonuses are wages regardless of the fact that they are
uniform in amount, do not vary based on seniority or
position or any other factor, and are not explicitly
contingent on the performance of services.
These rulings will appear in Internal Revenue Bulletin
2004-50, dated December 13, 2004 ]
