Signing bonus


D

Dan Bock

I am a graduate student who will finish school in May of
2006. In late 2005 I received a $1000 signing bonus from a
company where I will begin working after graduation. The
check did not have any taxes withheld from it. The company
did not send me a 1099 or a W-2. Is this taxable on my 2005
tax return?
 
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C

cpabakem01

Rev. Rul. 2004-109
Rev. Rul. 2004-109, 2004-50 I.R.B. 958
Internal Revenue Service (I.R.S.)
Revenue Ruling
SIGNING OR RATIFYING BONUSES
Released: November 23, 2004
Published: December 13, 2004

Section 3121.--Definitions, 26 CFR 31.3121(a)-1: Wages.

(Also: ss 3306, 3401, 31.3306(b)-1, 31.3401(a)-1.)

Signing or ratifying bonuses. This ruling holds that
certain amounts paid to an employee as a signing bonus for a
baseball contract or as a ratifying bonus pursuant to a
collective bargaining agreement are wages for purposes of
the Federal Insurance Contributions Act (FICA), the Federal
Unemployment Tax Act (FUTA), and the Collection of Income
Tax at Source on Wages (federal income tax withholding).
Rev. Ruls. 58-145 and 74-108 revoked. Rev. Ruls. 69-424 and
71-532 obsoleted.

ISSUE

Whether certain amounts an employer pays as bonuses for
signing or ratifying a contract are wages for purposes of
the Federal Insurance Contributions Act (FICA), the Federal
Unemployment Tax Act (FUTA), and the Collection of Income
Tax at Source (Federal income tax withholding)?

FACTS

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.

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.

LAW

Sections 3101 and 3111 of the Internal Revenue Code (Code)
impose FICA taxes on "wages," as that term is defined in
section 3121(a), with respect to "employment," as that term
is defined in section 3121(b). FICA taxes consist of the
Old-Age, Survivors and Disability Insurance tax (social
security tax) and the Hospital Insurance tax (Medicare tax).
These taxes are imposed on both the employer and employee.
Sections 3101(a) and 3101(b) impose the employee portions of
the social security tax and the Medicare tax, respectively.
Sections 3111(a) and 3111(b) impose the employer portions of
the social security tax and the Medicare tax, respectively.

The term "wages" is defined in section 3121(a) for FICA
purposes as all remuneration for employment, with certain
specific exceptions. Section 3121(b) defines the term
"employment" as any service, of whatever nature, performed
by an employee for the person employing him, with certain
specific exceptions.

Section 31.3121(a)-1(b) of the Employment Tax Regulations
provides that the term "wages" means all remuneration for
employment unless specifically excepted under section
3121(a). Section 31.3121(a)-1(c) provides that the name by
which the remuneration for employment is designated is
immaterial. Salaries, fees, and bonuses are wages, if paid
as compensation for employment. Section 31.3121(a)-1(d)
provides that generally the basis upon which the
remuneration is paid is immaterial in determining whether
the remuneration is wages. Section 31.3121(b)-3(b) defines
employment as services performed by an employee for an
employer, unless specifically excepted under section
3121(b).

The FUTA taxation provisions are similar to the FICA
provisions, except that only the employer pays the tax
imposed under FUTA. See sections 3301 and 3306(b) and the
regulations thereunder. Although there are differences in
the statutory exceptions to what constitutes wages and
employment, the general definitions of the terms "wages" and
"employment" for FUTA purposes are similar to the
definitions for FICA purposes. See sections 3306(b) and
3306(c).

Section 3402(a), relating to Federal 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. The term "wages" is defined in section 3401(a)
for Federal income tax withholding purposes as all
remuneration for services performed by an employee for his
employer, with certain specific exceptions. Section
31.3401(a)-1(a)(2) provides that the name by which
remuneration for services is designated is immaterial. Thus,
salaries, fees and bonuses are wages if paid as compensation
for services performed by the employee for his employer.
Section 31.3401(a)-1(a)(3) provides that generally the basis
upon which the remuneration is paid is immaterial in
determining whether the remuneration is wages. Unlike the
FICA and the FUTA, the Federal income tax withholding
provisions do not include a definition of employment.

Revenue Ruling 58-145, 1958-1 C.B. 360, in answering four
specific questions, holds that a bonus paid by a baseball
club to an individual solely for signing the individual's
first contract and not in any way contingent on the
performance of subsequent services is not remuneration for
services and, therefore, is not wages for purposes of
Federal income tax withholding under section 3402. The
ruling further holds that a bonus paid to a baseball player
that is contingent upon the performance of subsequent
services is wages subject to Federal income tax withholding.

Revenue Ruling 69-424, 1969-2 C.B. 15, holds that amounts
paid by a baseball club for educational expenses of a minor
league baseball player attending college were not
scholarships excluded from income under section 117 because
the payments were "compensation for past, present or future
employment services" within the meaning of section 1.117-4
of the Income Tax Regulations. The contract provided that
the club was not required to make the payments if the player
failed to attend the college for two consecutive years
without proper reason, did not report for spring training as
directed by the club, or was placed on the voluntarily
retired, disqualified or ineligible list. The ruling holds
that the payments are wages for Federal income tax
withholding and FICA purposes.

Revenue Ruling 71-532, 1971-2 C.B. 356, holds that Rev. Rul.
69-424 is to be applied without retroactive effect with
respect to wages paid prior to January 1, 1970. The ruling
makes clear that the amount paid for certain educational
expenses under the employment contract described in Rev.
Rul. 69-424 is distinguishable from the bonus paid solely as
consideration for signing a contract described in Rev. Rul.
58-145, but nonetheless limits the retroactive effect of
Rev. Rul. 69-424.

Rev. Rul. 74-108, 1974-1 C.B. 248, analyzes whether a
sign-on fee paid by a domestic corporation that operates a
professional soccer club to a non-resident alien player as
an inducement not to negotiate with any other team is
treated as income from sources within or without the United
States. Rev. Rul. 74-108 cites Rev. Rul. 58-145 as authority
for the conclusion that the sign-on fee is not compensation
for labor or personal services and that, therefore, source
is not determined under the rules in section 861(a)(3) or
862(a)(3). Instead, Rev. Rul. 74-108 characterized the
sign-on fee as a payment for a covenant not to compete both
within and without the United States, with the result that
the sign-on fee was attributable to sources both within and
without the United States.

ANALYSIS

The Code and regulations provide that amounts an employer
pays an employee as remuneration for employment are wages,
unless a specific exception applies. Sections 3121(a),
3306(b), and 3401(a) and sections 31.3121(a)-1(b),
31.3306(b)-1(b), and 31.3401(a)-1(a)(1) of the regulations.
The regulations also provide that the name by which the
remuneration is designated is immaterial. Salaries, fees,
and bonuses, for example, are all wages, if paid as
compensation for employment. Sections 31.3121(a)-1(c),
31.3306(b)- 1(c), and 31.3401(a)-1(a)(2).

The Code and the regulations also provide that any service
of whatever nature performed by an employee for the person
employing him is employment, unless a specific exemption
applies. Sections 3121(b) and 3306(c) and sections
31.3121(b)-3(b) and 31.3306(c)-2(b).

Employment encompasses the establishment, maintenance,
furtherance, alteration, or cancellation of the
employer-employee relationship or any of the terms and
conditions thereof. If the employee provides clear,
separate, and adequate consideration for the employer's
payment that is not dependent upon the employer-employee
relationship and its component terms and conditions, the
payment is not wages for purposes of FICA, FUTA, or Federal
income tax withholding.

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.

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.

Revenue Ruling 58-145 considered whether Federal income tax
withholding applied to a bonus paid to a baseball player at
the time a first contract was signed with a baseball club.
It erred in its analysis by failing to apply the Code and
regulations appropriately to the question of whether the
bonus was wages in each of the four questions presented.
Specifically, it failed to apply the correct definition of
wages and to consider whether the bonus was paid in
connection with establishing the employer-employee
relationship. Accordingly, Rev. Rul. 58-145 is revoked. In
addition, Rev. Rul. 74-108 is revoked as its conclusion
relies upon Rev. Rul. 58-145.

HOLDING

Amounts an employer pays as bonuses for signing or ratifying
a contract in connection with the establishment of the
employer-employee relationship are wages for purposes of
FICA, FUTA, and Federal income tax withholding. Accordingly,
the payments in Situations 1 and 2 are wages for purposes of
FICA, FUTA, and Federal income tax withholding.

EFFECT ON OTHER RULINGS

Rev. Rul. 58-145 and Rev. Rul. 74-108 are revoked. Rev. Rul.
69-424 and Rev. Rul. 71-532 are obsoleted in view of the
amendment of section 117 by section 123(a) of the Tax Reform
Act of 1986, 1986-3 (Vol.1) C.B. 1, 29. See section 117(c)
and Notice 87-31, 1987-1 C.B. 475.

APPLICATION

Under the authority of section 7805(b), the Service will not
apply the position adopted in this ruling to any signing
bonus, sign-on fee, or similar amount paid to an employee in
connection with the employee's initial employment with the
employer pursuant to a sign-on agreement or other contract
entered into before January 12, 2005, provided the amount is
paid under facts and circumstances that are substantially
the same as in Rev. Rul. 58-145 or Rev. Rul. 74-108.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Marie
Cashman and Stephen Suetterlein of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt & Government
Entities). For further information regarding this revenue
ruling, contact Mr. Suetterlein at (202) 622-6040 (not a
toll-free call).

Rev. Rul. 2004-109, 2004-50 I.R.B. 958
 
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